<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 1-8514
SMITH INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3822631
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16740 HARDY STREET 77032
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (281) 443-3370
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK NEW YORK STOCK EXCHANGE, INC.
PACIFIC STOCK EXCHANGE, INC.
(TITLE OF CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
on March 21, 2000 was $3,251,093,883 (47,202,815 shares at the closing price on
the New York Stock Exchange of $68.875). For this purpose all shares held by
officers and directors and their respective affiliates are considered to be held
by affiliates, but neither the Registrant nor such persons concede that they are
affiliates of the Registrant.
There were 50,038,435 shares of common stock outstanding at March 21,
2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement related to the Registrant's 2000 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form
10-K.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Smith International, Inc. ("Smith" or the "Company") is a leading
worldwide supplier of premium products and services to the oil and gas
exploration and production industry, the petrochemical industry and other
industrial markets. The Company provides a comprehensive line of
technologically-advanced products and engineering services, including drilling
and completion fluid systems, solids-control equipment, waste-management
services, three-cone and diamond drill bits, fishing services, drilling tools,
underreamers, casing exit and multilateral systems, packers and liner hangers.
The Company also offers supply-chain management solutions through an extensive
branch network providing pipe, valves, fittings, mill, safety and other
maintenance products. The Company was incorporated in the State of California in
January 1937 and reincorporated under Delaware law in May 1983. The Company's
executive offices are headquartered at 16740 Hardy Street, Houston, Texas 77032
and its telephone number is (281) 443-3370.
The Company's operations are classified into two reportable segments:
Oilfield Products and Services Group and Distribution Group. The Oilfield
Products and Service Group consists of three business units: M-I L.L.C. ("M-I"),
which primarily provides drilling and completion fluid systems and services,
solids-control equipment and waste-management services; Smith Bits, which
manufactures and sells three-cone and diamond drill bits; and Smith Services,
which manufactures and markets products and services used for drilling,
workover, well completion and well re-entry operations. The Distribution Group
consists of one business unit: Wilson, which markets pipe, valves, fittings,
mill, safety and other maintenance products to energy and industrial markets.
Financial information regarding reportable segments and international
operations appears in Note 13 of the Notes to Consolidated Financial Statements
included elsewhere in this Form 10-K. Information related to acquisitions and
dispositions appear in Note 2 of the Notes to Consolidated Financial Statements
included elsewhere in this Form 10-K.
INDUSTRY OVERVIEW
The Company's worldwide operations are largely driven by the level of
exploration and production activity in major energy producing areas and the
depth and drilling conditions of these projects. Drilling activity levels are
primarily influenced by energy prices but may also be affected by expectations
related to the worldwide supply for oil and natural gas, finding and development
costs, decline and depletion rates, political actions and uncertainties,
environmental concerns, capital expenditure plans of exploration and production
companies and the overall level of global economic growth and activity.
Management anticipates that the average worldwide rig count in 2000
will increase from the record low activity levels reported in the prior year
driven by a combination of increased North American natural gas demand,
declining crude oil inventory levels, improved commodity prices and a moderate
increase in global energy demand. Increased natural gas-focused drilling
activity in North America, which began in the last half of 1999 and has
continued into the first quarter of 2000, has contributed the majority of the
improvement to date in the worldwide rig count. Drilling activity outside of
North America, which is generally slower to respond to commodity prices due to
the longer lead times necessitated by the size and scope of these projects,
remains near record low levels and is not expected to improve until the second
half of 2000. Although a number of operators have announced plans to increase
exploration and production spending in 2000, a substantial increase in
production by members of the Organization of the Petroleum Exporting Countries
could adversely impact anticipated improvements in activity levels.
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BUSINESS OPERATIONS
OILFIELD PRODUCTS AND SERVICES GROUP
M-I
M-I Fluids
Products and Services. The Company is a leading worldwide provider of
drilling fluid systems, products and engineering services to end users engaged
in drilling oil, natural gas and geothermal wells. Drilling fluid products and
systems are used to cool and lubricate the bit during drilling operations,
contain formation pressures, suspend and remove rock cuttings from the hole and
maintain the stability of the wellbore. Engineering services are provided to
ensure that the products and systems are applied effectively to optimize
drilling operations. These services include recommending products and services
during the well planning phase; monitoring drilling fluid properties;
recommending adjustments during the drilling phase; and analyzing/benchmarking
well results after completion of the project to improve the efficiencies of
future wells.
M-I Fluids offers water-base, oil-base and synthetic-base drilling
fluid systems. Water-base drilling fluids are the world's most widely utilized
systems, having application in both land and offshore environments. Typically,
these systems comprise an engineered blend of weighting materials used to
contain formation pressures, and a broad range of chemical additives, specially
designed to yield the specific drilling performance characteristics required for
a given drilling project. Oil-base drilling fluids, which primarily are used to
drill water-sensitive shales, reduce torque and drag and are widely used in
areas where stuck pipe is likely to occur. In certain drilling areas of the
world, oil-base systems exhibit comparably higher penetration rates when
compared to water-base systems, significantly reducing time on location and
overall drilling costs. Synthetic-base drilling fluids are used in drilling
environments where oil-base fluids are environmentally prohibited and provide
the performance benefits of oil-base systems. Synthetic-base systems are
particularly advantageous in the deepwater environment.
Completion fluids (clear brines) are solids-free, clear-salt solutions
with high specific gravities and are non-damaging to the producing formation.
Oil and gas operators use these specially designed fluid systems in combination
with a comprehensive range of specialty chemicals to control bottom-hole
pressures, while meeting the specific corrosion, inhibition, viscosity and fluid
loss requirements during the completion and workover phase of a well. These
systems are specially designed to maximize well production by minimizing
formation damage that can be caused by solids-laden systems. M-I Fluids provides
a complete line of completion fluids products and services, including a
full-range of low- and high-density brines, specialty chemicals, filtration and
chemical treatment services used in the reclamation of these specialized fluids,
wellsite engineering, technical and laboratory support services.
Competition. Within the oil service industry, M-I Fluids competes in a
variety of distinct segments with a number of different competitors. The major
competitors in the worldwide drilling fluid industry are Baroid Drilling Fluids
(a division of Halliburton Company ("Halliburton")) and INTEQ (a division of
Baker Hughes, Inc. ("Baker Hughes")). While these companies supply a majority of
the market, the drilling fluids industry is highly competitive, with a
significant number of smaller, locally-based competitors, as well as limited
product producers that market their products without technical services.
Differentiation within the competition is based upon the engineering services
provided at the wellsite, product quality and availability, technical support,
service response and price.
M-I Completion Fluids has four main competitors in the sale of clear
brine fluids to end-use markets: Baroid Completion Fluids (a division of
Halliburton), Tetra Technologies, Inc., OSCA, Inc. (a subsidiary of Great Lakes
Chemical Corporation) and Ambar, Inc. This market is highly competitive, and
competition is based primarily on product availability, technical service and
price.
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M-I SWACO
Products and Services. M-I's SWACO division offers a complete line of
solids control, pressure control, rig instrumentation and waste management
services to the worldwide drilling market on both a sale and rental basis. Key
products in the pressure control line include the MUD D-GASSER(R) and SUPER
CHOKE(R), which holds a strong market position, as well as the SUPER MUD GAS
SEPARATOR(TM) and 10K UnderBalanced Drilling Choke(TM), which is a key
advancement in underbalanced drilling operations. The solids control line of
shakers - MUD CLEANERS(TM), hydroclones and centrifuges - was designed to offer
operators the option of drilling in "dry locations", where drilling fluid waste
is minimized and handled in an environmentally acceptable manner. SWACO's rig
instrumentation line features SG-SMART(R) Data Acquisition Systems, advanced
monitoring systems that measure, monitor and display the drilling status of a
well with high speed accuracy. In addition, SWACO's advances in slurrification
and re-injection, vacuum cuttings collection and high gravity force drying have
enabled the group to provide a full suite of waste-minimization and management
services. Further, the recent acquisition of SCC Environmental's Thermal Phase
Separation(TM) (TPS(TM)) process gives operators a proven thermal desorption
technology for maximum recovery of drilling fluids and minimization of waste
materials.
Competition. SWACO competes with Brandt/EPI (a subsidiary of Tuboscope
Inc.), Derrick Equipment Company and Martin Decker Totco (a subsidiary of Varco
Industries). Additionally, there are a number of regional suppliers that provide
a limited range of equipment and services tailored for local markets.
Competition is based on product availability, equipment performance, technical
support and price.
Smith Bits
Products. The Smith Bits business unit is a worldwide leader in the
design, manufacture and marketing of drill bits used in drilling oil and gas
wells and in mining applications under the Smith Tool(TM), GeoDiamond(TM) and
Smith Mining(TM) product lines. Most bits manufactured by Smith Bits are
three-cone drill bits for the petroleum industry, ranging in size from 3 1/2 to
28 inches in diameter. These three-cone bits comprise two major components - the
body and the cones, which contain different types of pointed structures referred
to as "cutting structures" or "teeth." The cutting structures are either an
integral part of the steel cone with a hardmetal-applied surface (referred to as
"milled tooth") or made of an inserted material (referred to as "insert"), which
is usually tungsten carbide. In the last few years, there has been a significant
increase in demand for drill bits in which the tungsten carbide insert is coated
with polycrystalline diamond ("PDC"). In certain formations, bits produced with
diamond-enhanced inserts last longer and increase penetration rates, which
subsequently decreases overall drilling costs. Smith Bits is the leading
provider of drill bits utilizing diamond-enhanced insert technology.
Smith Bits also designs, manufactures and markets diamond, or shear,
drill bits featuring PDC or natural diamond cutters. The Company manufactures
PDC and cubic boron nitride at its MegaDiamond and Supradiamant subsidiaries.
These ultra-hard materials are used in the Company's three-cone and diamond
drill bits and other specialized cutting tools. MegaDiamond developed and uses
patented processes for applying diamonds to a curved surface with multiple
transition layers. Smith is the only oilfield equipment manufacturer that
develops, manufactures and markets its own synthetic diamond materials, which
provides the Company a cost and technological advantage. In addition, the
Company's in-house diamond research, engineering and manufacturing capabilities
enhance the Company's ability to develop the application of diamond technology
across other Smith product lines and into several non-energy cutting tool
markets. The Company believes that its ability to develop specialized diamond
inserts for specific applications has, and will continue, to provide new
business opportunities.
Mining bits typically are used in shallow drilling to place explosives
for blasting in open pit mining operations. While the cutting structures in
mining bits are principally tungsten carbide insert ("TCI"), others, known as
hammer bits, employ both tungsten carbide and diamond-enhanced inserts and have
been designed for use with air percussion tools.
Competition. Besides the Company, Hughes Christensen (a division of
Baker Hughes), Security DBS (a division of Halliburton) and Reed/Hycalog (a
division of Schlumberger Limited ("Schlumberger")) are the three major
competitors in the drill bit business. While the Company and Hughes Christensen
maintain the leading shares of worldwide revenues in drill bits, they compete
with more than 20 competitors. Generally, competition for sales of drill bits is
based on a number of factors, including performance, quality, reliability,
service, price, technological advances and breadth of products. The Company
believes its quality reliability and technological advances, such as diamond
enhanced inserts, provide its products with a competitive advantage.
3
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Smith Services
Products and Services. The Smith Services business unit, formerly Smith
Drilling & Completions, provides drilling, remedial and completion products and
services to end-users engaged in drilling oil, natural gas and geothermal wells.
Smith Services' operational groups include the Drilco Group, Red Baron Group,
Lindsey Group, HE Group and Directional Group.
The Drilco Group's products and services include: rotating drilling
heads for flow control in underbalanced drilling; automatic connection torque
monitoring and control systems; downhole drilling tools; tubular drill string
components (drill collars, subs, kellys, Hevi-WateTM drill pipe); drilling tool
and drill string inspection products and services; drill string repair and
rebuild services and production tubulars; and sucker rod inspection and repair.
The Red Baron Group's products and services include: casing exit and
multilateral services; remedial, re-entry and fishing services used in
specialized drilling and workover operations; underreaming and hole opening
services to provide additional annular space in the well bore for cementing
and/or gravel packing; coiled and thru-tubing products and services; mechanical,
hydraulic, and explosive pipe cutting to remove casing during a well or platform
abandonment and multi-lateral installations. The Red Baron Group's products
include the patented Reamaster(TM) and Underream-While-Drilling System(TM) which
allow two operations to be performed simultaneously. The product group also
includes the patented Millmaster(TM) Performance Milling System, the patented
Packstock(TM) and Anchorstock(TM) Performance Window Cutting System and the
TrackMaster(TM) System.
The Lindsey Group's products and services include: liner hangers,
cementing products and tools, liner top packers and tie-back equipment, setting
tools and permanent and temporary packers plus the service personnel to install
these products in the well bore.
The HE Group specializes in the design and distribution of drilling and
fishing jars with associated accelerators, as well as, general fishing tools.
With its Hydra-Jar(R), the HE Group is a worldwide leader in drilling jars.
Other innovations include the Hydra-Thrust(TM) and Hydra-Thorax(TM) tools which
are designed to maintain constant weight on the drill bit and absorb drill
string torsional and axial vibrations. In addition, the HE Group provides
technically innovative impact tools for fishing and coil tubing applications to
aid in well remedial operations.
The Directional Group provides directional drilling, motor and
Measurement While Drilling (MWD) products and services to U.S. operators.
Generally, all products are manufactured by the same management with
each specific product group marketed, maintained and operated by group specific
management.
Competition. The Company's major competitors in the drilling, remedial,
re-entry and fishing services markets are Weatherford International, Inc.
("Weatherford"), Baker Oil Tools (a division of Baker Hughes) and numerous small
local companies. The main competitors in the completion market are Baker Oil
Tools and Weatherford. Competition in the drilling and completions sales,
rentals and services market is primarily based on performance, quality,
reliability, service, price, response time and, in some cases, breadth of
products. The main competitor in the drilling jar market is Weatherford; in the
fishing jar and tool market, the competitors include Weatherford and Bowen Oil
Tools (a division of IRI International). Smith Services attributes its
competitive position to its commitment to technological advancements that add
value to the customer's programs plus the quality, performance and service of
its products and employees.
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DISTRIBUTION GROUP
Wilson
Products and Services. Wilson is a supply-chain management company
which provides products and services to the energy, refining, petrochemical,
power generation and mining industries. Wilson operates an extensive network of
supply branches, service centers and sales offices through which it markets
pipe, valves, fittings, mill, safety, janitorial and other maintenance products
throughout the world, predominately in the United States and Canada. In
addition, Wilson provides warehouse management, vendor integration and various
surplus and inventory management services. The majority of Wilson's operations
are focused on North American distribution of maintenance, repair and operating
supplies and equipment with the remainder associated with line pipe and
automated valve products (including valve, actuator and control packages).
Competition. Wilson's competitors in the distribution business include
National Oilwell Inc., McJunkin Corporation and a significant number of smaller,
locally-based competitors. The oilfield equipment supply industry is highly
competitive. Generally, competition involves numerous factors including price,
experience, customer service and equipment availability. Wilson markets its
products and services to exploration and production companies as well as to
companies with operations in the refining, chemical and pipeline segments of the
petroleum industry and as a result is considered to be both an "upstream" and
"downstream" competitor. Fluctuations in the demand for products and services
from customers with operations in these segments tend to provide a diversified
revenue base.
NON-U.S. OPERATIONS
Sales to oil and gas exploration and production markets outside the
United States are a key strategic focus of Smith's management. The Company
markets its products and services through subsidiaries, joint ventures and sales
agents located in virtually all petroleum producing areas of the world,
including Canada, the North Sea/Europe, the Middle East, Latin America,
Asia/Pacific and Africa. Approximately 54 percent of the Company's revenues in
1999 were derived from equipment or services sold or provided outside the United
States.
Historically, drilling activity outside the United States has been less
volatile than U.S. based activity as the high cost of exploration and production
programs outside the United States are generally undertaken by major oil
companies, consortiums and national oil companies. These entities operate under
longer-term strategic priorities than do the independent drilling operators that
are more common in the U.S. market.
SALES AND DISTRIBUTION
Sales and service efforts are directed to end users in the drilling and
completion industry including major and independent oil companies, national oil
companies and independent drilling contractors. The Company's products and
services are primarily marketed through the direct sales force of each business
unit. In certain non-U.S. markets where direct sales efforts are not
practicable, the Company utilizes independent sales agents, distributors or
joint ventures.
Smith maintains field service centers, which function as repair and
maintenance facilities for rental tools, operations for remedial and completion
service and a base for the Company's global sales force, in every major oil and
gas producing area of the world. The location of these service centers near the
Company's customers is an important factor in maintaining favorable customer
relations.
MANUFACTURING
The Company's manufacturing operations, along with quality control
support, are designed to ensure that all products and services marketed by the
Company will meet standards of performance and reliability consistent with the
Company's reputation in the industry.
Management believes that it generally has sufficient internal
manufacturing capacity to meet anticipated demand for its products and services.
During periods of peak demand certain business units utilize outside resources
to provide additional manufacturing capacity.
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RAW MATERIALS
Through its company-owned mines in and outside the United States, M-I
has the capability to produce a large portion of its requirements for barite and
bentonite. Barite reserves are mined in the United States, the United Kingdom
and Morocco. Bentonite is produced from ore deposits in the United States.
Mining exploration activities continue worldwide to locate and evaluate ore
bodies to ensure deposits are readily available for production when market
conditions dictate. In addition to its own production, M-I purchases a majority
of its worldwide barite requirements from suppliers outside the United States,
mainly the People's Republic of China, India and Morocco.
The Company purchases a variety of raw materials for its Smith Bits and
Smith Services units, including alloy and stainless steel bars, tungsten carbide
inserts and forgings. Generally, the Company is not dependent on any single
source of supply for any of its raw materials or purchased components. The
Company purchases a significant amount of tungsten carbide inserts and U.S.
forging requirements from two suppliers under separate supply agreements. The
Company believes that numerous alternative supply sources are available for all
such materials. The Company produces PDC in Provo, Utah and Scurelle, Italy for
utilization in various Company products as well as direct customer sales. The
Company believes that it enjoys a competitive advantage in the manufacture of
diamond drill bits because it is the only diamond drill bit producer with
substantial PDC manufacturing capabilities.
PRODUCT DEVELOPMENT, ENGINEERING AND PATENTS
The Company's business units maintain product development and
engineering departments whose activities are focused on improving existing
products and services and developing new technologies to meet customers demands
for improved drilling performance and environmental-based solutions for drilling
and completion operations. The Company's primary research facilities are located
in Houston, Texas, Stavanger, Norway, Aberdeen, Scotland and St. Austell,
England.
The Company also maintains a drill bit database which records the
performance of substantially all drill bits used in the U.S. over the last 15
years, including those manufactured by competitors. This database gives the
Company the ability to monitor, among other things, drill bit failures and
performance improvements related to product development. Management believes
this proprietary data base gives the Company a competitive advantage in the
drill bit business.
The Company has historically invested significant resources in research
and engineering in order to provide customers with broader product lines and
technologically-advanced products and services. The Company's expenditures for
research and engineering activities amounted to $39.0 million in 1999, $41.0
million in 1998 and $34.9 million in 1997. In 1999, research and engineering
expenditures approximated 2.2 percent of revenues.
Although the Company has over 700 patents and regards its patents and
patent applications as important in the operation of its business, it does not
believe that any significant portion of its business is materially dependent
upon any single patent or group of patents or upon patent protection in general.
EMPLOYEES
At December 31, 1999, the Company had 7,524 full time employees
throughout the world. Most of the Company's employees in the United States are
not covered by collective bargaining agreements except in certain U.S. mining
operations of M-I. The Company considers its labor relations to be satisfactory.
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ITEM 2. PROPERTIES
The principal facilities and properties utilized by the Company at
December 31, 1999 are shown in the table below. Generally the facilities and
properties are owned by the Company.
<TABLE>
<CAPTION>
Approx.
Principal Products Processed Land Bldg. Space
Location or Manufactured (Acres) (sq. ft.)
- -------- --------------- ------- ---------
<S> <C> <C> <C>
M-I L.L.C.:
Greybull, Wyoming.............. Bentonite mine and processing 8,394 110,000
Oklahoma City, Oklahoma........ Solids control, rig instrumentation and
environmental remediation equipment 13 99,000
Appleton, Wisconsin............ Drilling fluid chemical products 10 93,000
Wharton County, Texas.......... Drilling fluid chemical products 100 61,000
Karmoy, Norway................. Barite and bentonite processing 5 51,000
Greystone, Nevada.............. Barite mine and processing 268 50,000
Battle Mountain, Nevada........ Barite processing 23 43,000
Zelmou, Morocco................ Barite mine 3,954 41,000
Zavalla, Texas................. Drilling fluid chemical products 33 36,000
Airdrie, Canada................ Solids control equipment 4 27,000
Amelia, Louisiana.............. Barite processing 26 25,000
Spruce Grove, Canada........... Drilling fluid processing 3 24,000
Salzweld, Germany.............. Drilling fluid processing 2 23,000
Berra, Italy................... Solids control equipment 2 24,000
Galveston, Texas............... Barite processing 6 21,000
Aberdeen, Scotland............. Barite and bentonite processing 2 12,000
Foss/Aberfeldy, Scotland....... Barite mine and processing 102 10,000
Mountain Springs, Nevada....... Barite mine 900 --
Westlake, Louisiana............ Barite processing 3 --
Smith Bits and Smith Services:
Houston, Texas................. Tubulars, surface and downhole
tools, remedial products, liner
hangers, diamond drill bits,
drilling and fishing jars and fishing tool
equipment 82 618,000
Ponca City, Oklahoma........... Three-cone drill bits 15 207,000
Aberdeen, Scotland............. Downhole tools and remedial products 10 132,000
Saline di Volterra, Italy...... Three-cone drill bits 11 92,000
Aberdeen, Scotland............. Downhole tools and remedial products 10 91,000
Nisku, Canada.................. Tubulars and drill collars 10 42,000
Scurelle, Italy................ Diamond drill bits and synthetic diamond 4 31,000
materials
Provo, Utah.................... Synthetic diamond materials 4 30,000
Wilson:
Houston, Texas................. Pipe, valves and fittings 11 198,000
</TABLE>
The Company considers its mines and manufacturing and processing
facilities to be in good condition and adequately maintained.
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ITEM 3. LEGAL PROCEEDINGS
Information relating to various commitments and contingencies,
including legal proceedings, is described in Note 14 of the Notes to
Consolidated Financial Statements included elsewhere in this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 4A. OFFICERS OF THE REGISTRANT
(a) The names and ages of all officers of the Company, all positions
and offices with the Company presently held by each person named and their
business experience during the last five years are stated below. Positions,
unless otherwise specified, are with the Company.
<TABLE>
<CAPTION>
NAME, AGE AND POSITIONS PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
----------------------- -------------------------------------------
<S> <C>
Douglas L. Rock (53)..................... Chairman of the Board, Chief Executive Officer, President and Chief
Chairman of the Board, Chief Operating Officer.
Executive Officer, President
and Chief Operating Officer
Loren K. Carroll (56).................... President and Chief Executive Officer of M-I L.L.C. since March 1994; Executive Vice
Executive Vice President of the President since October 1992; Chief Financial Officer from October 1992 to
Company; President and Chief April 1997; member of the Board of Directors since November 1987.
Executive Officer of M-I L.L.C.
Neal S. Sutton (54)...................... Senior Vice President--Administration, General Counsel and Secretary
Administration, General
Counsel and Secretary
Margaret K. Dorman (36).................. Senior Vice President, Chief Financial Officer and Treasurer since June 1999; Vice
Senior Vice President, Chief President, Controller and Assistant Treasurer from February 1998 to May 1999;
Financial Officer and Treasurer Director of Financial Reporting and Planning from December 1995 to February 1998;
Various positions including Corporate Controller for Landmark Graphics
Corporation from November 1992 to November 1995.
Roger A. Brown (54)...................... President, Smith Bits since July 1998; President, Smith Diamond Technology from April
President, Smith Bits 1995 to July 1998; Vice President and General Manager, Eastern Hemisphere
Operations, Reda Pump Company, Division of Camco International, Inc. from
November 1993 to March 1995.
John J. Kennedy (47)..................... President and Chief Executive Officer, Wilson since June 1999; Senior Vice President,
President and Chief Executive Chief Financial Officer and Treasurer from April 1997 to May 1999; Vice President,
Officer, Wilson Chief Accounting Officer and Treasurer from March 1994 to April 1997.
Richard A. Werner (58)................... President, Smith Services.
President, Smith Services
Peter D. Nicholson (43).................. Vice President, Human Resources since February 1998; Director, Human Resources from
Vice President, Human Resources June 1997 to February 1998; International Human Resources Manager, Eastern
Hemisphere from December 1995 to June 1997; Director of Human Resources of Baker
Hughes INTEQ in Aberdeen from February 1993 to December 1995.
</TABLE>
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<TABLE>
<CAPTION>
NAME, AGE AND POSITIONS PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
----------------------- -------------------------------------------
<S> <C>
Earl M. Springer (49).................... Vice President, Business Development since February 1998; Manager of Business
Vice President, Business Development from July 1997 to February 1998; Manager of Technology Development
Development from August 1994 to July 1997.
Brian E. Taylor (37)..................... Vice President and Controller since December 1999; Various positions including
Vice President and Controller Controller for Camco International Inc., a division of Schlumberger Limited, from
January 1998 to August 1999; Director of Central Financial Services for Drypers
Corporation from October 1996 to December 1997; Arthur Andersen LLP, Audit
Practice from December 1986 to September 1996.
Geri D. Wilde (49)....................... Vice President, Taxes since February 1998; Director of Taxes from April 1997 to February
Vice President, Taxes and 1998; Assistant Treasurer since April 1997; Manager of Taxes and Payroll of
Assistant Treasurer M-I L.L.C. from December 1986 to April 1997.
</TABLE>
(b) All officers of the Company are elected annually by the Board of
Directors at the meeting of the Board of Directors held immediately following
the annual meeting of shareholders. They hold office until their successors are
elected and qualified.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The common stock of the Company is traded on the New York Stock
Exchange and the Pacific Stock Exchange. The following are the high and low sale
prices for the Company's common stock as reported on the New York Stock Exchange
Composite Tape for the periods indicated.
<TABLE>
<CAPTION>
COMMON STOCK
HIGH LOW
------- -------
<S> <C> <C>
1998
First Quarter .................................... 62 46 1/4
Second Quarter .................................... 64 1/2 33 3/8
Third Quarter .................................... 38 3/16 17 1/4
Fourth Quarter .................................... 39 5/16 19 5/16
1999
First Quarter .................................... 43 1/2 23 9/16
Second Quarter .................................... 49 7/8 35 1/4
Third Quarter .................................... 52 1/16 39 1/16
Fourth Quarter .................................... 50 1/8 31 5/8
</TABLE>
On March 21, 2000, the Company had 2,719 common stock holders of record
and the last reported closing price on the New York Stock Exchange Composite
Tape was $68.875.
The Company has not paid dividends on its common stock since the first
quarter of 1986. The determination of the amount of future cash dividends to be
declared and paid on the common stock, if any, will depend upon the Company's
financial condition, earnings and cash flow from operations, the level of its
capital expenditures, its future business prospects and other factors that the
Board of Directors deem relevant. In addition, the Company's debt agreements
contain covenants restricting the payment of cash dividends to the Company's
common stockholders based on net earnings and operating cash flow formulas as
defined.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999(a) 1998(b) 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .................................. $1,806,153 $2,118,715 $2,167,952 $1,651,906 $1,270,478
Gross profit .............................. 467,940 629,059 652,599 472,728 355,875
Income before interest and taxes (c) ...... 149,532 125,309 248,946 148,785 92,616
Net income ................................ 56,724 34,069 121,329 73,297 49,088
Earnings per share - diluted basis ........ 1.15 0.70 2.52 1.53 1.04
BALANCE SHEET DATA:
Total assets .............................. $1,894,575 $1,758,988 $1,672,499 $1,287,262 $ 881,137
Long-term debt ............................ 346,647 368,823 371,579 260,443 144,138
Total shareholders' equity ................ 720,220 634,034 572,045 454,269 377,829
</TABLE>
In April 1998, the Company acquired Wilson Industries, Inc. in a
transaction accounted for as a pooling of interests. Accordingly, the financial
information gives effect to the acquisition for all periods presented. The Notes
to Consolidated Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this Form
10-K should be read in order to understand factors such as business combinations
and unusual items which may affect the comparability of the information shown
above.
(a) In May 1999, the Company acquired the distribution operations of
ConEmsco, Inc. in exchange for 548,527 shares of common stock and a
note payable. In July 1999, the Company completed a transaction with
Schlumberger Limited related to the combination of certain M-I L.L.C
and Dowell drilling fluid operations under a joint venture arrangement.
Schlumberger contributed its non-U.S. drilling fluid operations and
paid cash consideration of $280 million to the Company in exchange for
a 40 percent minority ownership interest in the combined operations.
The Company recognized a non-recurring gain of $81.4 million in
connection with this transaction.
(b) In August 1998, the Company acquired the remaining 36 percent interest
in M-I in exchange for a $265.0 million non-interest bearing note.
(c) In 1998, the Company recognized $82.5 million of charges related to
restructuring efforts and costs associated with the acquisition and
integration of Wilson Industries, Inc.
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following "Management's Discussion and Analysis of Financial
Condition and Results of Operations" is provided to assist readers in
understanding the Company's financial performance during the periods presented
and significant trends which may impact the future performance of the Company.
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the related notes thereto included
elsewhere in this Form 10-K.
The Company manufactures and markets premium products and services to
the oil and gas exploration and production and petrochemical industries and
other industrial markets. The Company's worldwide operations are largely driven
by the level of exploration and production activity in major energy producing
areas and the depth and drilling conditions of these projects. Drilling activity
levels are primarily influenced by energy prices but may also be affected by
expectations related to the worldwide supply of and demand for oil and natural
gas, finding and development costs, decline and depletion rates, political
actions and uncertainties, environmental concerns, capital expenditure plans of
exploration and production companies and the overall level of global economic
growth and activity.
Management anticipates that the average worldwide rig count in 2000
will increase from the record low activity levels reported in the prior year
driven by a combination of increased North American natural gas demand,
declining crude oil inventory levels, improved commodity prices and a moderate
increase in global energy demand. Increased natural gas-focused drilling
activity in North America, which began in the last half of 1999 and has
continued into the first quarter of 2000, has contributed the majority of the
improvement to date in the worldwide rig count. Drilling activity outside of
North America, which is generally slower to respond to commodity prices due to
the longer lead times necessitated by the size and scope of these projects,
remains near record low levels and is not expected to improve until the second
half of 2000. Although a number of operators have announced plans to increase
exploration and production spending in 2000, a substantial increase in
production by members of the Organization of the Petroleum Exporting Countries
could adversely impact anticipated improvements in activity levels.
Management believes the increasing complexity of drilling programs has
resulted in a shift in exploration and production spending toward value-added,
technology-based products, which reduce operators' overall drilling costs. The
Company continues to focus on investing in the development of technology-based
products that considerably improve the drilling process through increased
efficiency and rates of penetration and reduced formation damage. Management
believes the overall savings realized by the use of the Company's premium
products, such as polycrystalline diamond drill bits, diamond-enhanced
three-cone drill bits and synthetic drilling fluids, compensate for the higher
costs of these products over their non-premium counterparts.
Additionally, increased focus on streamlining operations by energy and
industrial companies has resulted in the adoption of web-based commerce
initiatives to lower procurement and inventory management costs. The Company is
currently implementing an electronic business ("eBusiness") strategy for its
supply-chain management operations and expects to have a web-site with
transacting capabilities operational in mid-2000. Management believes that the
planned eBusiness capabilities will complement the Company's worldwide logistics
and distribution infrastructure and will allow it to participate in the expected
increase in global web-based commerce.
SIGNIFICANT TRANSACTIONS
On July 25, 1999, the Company completed a transaction with Schlumberger
Limited ("Schlumberger") related to the combination of certain M-I L.L.C.
("M-I") and Dowell drilling fluids operations under a joint venture arrangement.
Schlumberger contributed its non-U.S. Dowell drilling fluid operations and paid
cash consideration to the Company in exchange for a 40 percent minority
ownership interest in the combined operations (collectively, the "M-I
Transaction").
12
<PAGE> 14
On May 28, 1999, the Company acquired certain operations of ConEmsco,
Inc. ("CE"), and CE's majority ownership interest in CE Franklin Ltd.
(collectively, the "ConEmsco Transaction"), businesses primarily engaged in
oilfield supply and distribution in the United States and Canada. In connection
with the acquisition, the Company issued 548,527 shares of common stock and a
$30.0 million note payable to the seller.
RESULTS OF OPERATIONS
Revenues
The Company markets its products and services throughout the world
through four business units which are aggregated into two reportable segments.
The Oilfield Products and Services Group consists of three business units: M-I
L.L.C., Smith Bits and Smith Services. The Distribution Group includes the
Wilson business unit. The business and revenue information below has been
summarized by business unit in order to provide additional information in
analyzing the Company's operations. Additional financial information regarding
reportable segments and international operations appears in Note 13 of the Notes
to Consolidated Financial Statements included elsewhere in this Form 10-K.
The following table presents revenue and average rig count information
for the periods shown (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues by Business Unit:
M-I L.L.C .......................... $ 842,214 47 $1,014,449 48 $1,001,048 46
Smith Bits ......................... 240,109 13 308,263 15 328,112 15
Smith Services...................... 227,216 13 323,456 15 295,498 14
Wilson ............................. 496,614 27 472,547 22 543,294 25
---------- ---------- ---------- ---------- ---------- ----------
Total ............................ $1,806,153 100 $2,118,715 100 $2,167,952 100
========== ========== ========== ========== ========== ==========
Revenues by Area:
U.S ................................ $ 834,783 46 $1,017,016 48 $1,147,244 53
Export ............................. 83,594 5 140,398 7 142,213 6
Non-U.S ............................ 887,776 49 961,301 45 878,495 41
---------- ---------- ---------- ---------- ---------- ----------
Total ............................ $1,806,153 100 $2,118,715 100 $2,167,952 100
========== ========== ========== ========== ========== ==========
Average Annual Active Rig Count:
U.S ................................ 622 829 945
Canada ............................. 246 260 375
Non-North America .................. 590 754 809
---------- ---------- ----------
Total ............................ 1,458 1,843 2,129
========== ========== ==========
</TABLE>
13
<PAGE> 15
Oilfield Products and Services Group
M-I L.L.C. provides drilling and completion fluid systems, engineering
and technical services to the oil and gas industry through its M-I Fluids
division. M-I's SWACO division manufactures and markets equipment and services
for solids control, pressure control, rig instrumentation and waste management.
M-I's 1999 revenues decreased $172.2 million, or 17 percent, from 1998, and 1998
revenues increased $13.4 million, or one percent, from 1997. The impact of a 21
percent reduction in average worldwide drilling activity from 1998 was partially
offset by revenues generated from the drilling fluid operations acquired from
Schlumberger in July 1999. Excluding the impact of the acquired operations,
M-I's revenues in 1999 were 23 percent below 1998 levels. The majority of the
revenue variance was reported in Latin America, the United States and
Europe/Africa. Revenues in 1998 increased over 1997 as lower U.S. volumes
associated with weak oil prices were offset by higher demand in Europe/Africa
and Latin America.
Smith Bits manufactures and sells three-cone and diamond bits primarily
for use in the oil and gas industry. The unit's MegaDiamond and Supradiamant
subsidiaries manufacture polycrystalline diamond and cubic boron nitride
materials which are used in drill bits and in other specialized cutting tools.
Smith Bits' 1999 revenues decreased $68.2 million, or 22 percent, from 1998, and
1998 revenues decreased $19.8 million, or six percent, from 1997. Reflecting the
decline in drilling activity in all geographic areas, demand for three-cone
petroleum bits was below 1998 levels and accounted for the substantial portion
of the revenue decline. The 1998 revenue decline from 1997 related to lower
North American activity levels which resulted in decreased unit sales of
petroleum three-cone bits. The impact of the decline in unit sales was partially
offset by improved pricing combined with increased volumes in the Eastern
Hemisphere.
Smith Services manufactures and markets products and services used in
the oil and gas industry for drilling, workover, well completion and well
re-entry. Smith Services' 1999 revenues decreased $96.2 million, or 30 percent,
from 1998, and 1998 revenues increased $28.0 million, or nine percent, from
1997. Reduced demand in 1999 for tubular goods and remedial products and
services due to lower drilling and production activity accounted for the
majority of the decline in revenues from 1998 levels. The majority of the
revenue growth from 1997 to 1998 was reported outside North America and related
to increased demand across all product lines.
Distribution Group
Wilson markets pipe, valves, fittings, mill, safety and other
maintenance products to energy and industrial markets primarily through an
extensive network of supply branches in the United States and Canada. Wilson's
revenues increased $24.1 million, or five percent, from 1998, and 1998 revenues
decreased $70.7 million, or 13 percent, from 1997. Incremental revenues
generated by the operations acquired in the ConEmsco Transaction in May 1999
accounted for the increase over 1998. Lower base operation revenues in the
United States, due to the decline in U.S. drilling activity from 1998 levels,
and the divestiture of Wilson's Oil Country Tubular Goods ("OCTG") operations
partially offset the increase. Excluding the impact of operations acquired and
divested during 1999, Wilson's revenues were 22 percent below 1998 levels. On a
geographic basis, the revenue decrease from 1997 was reported in the United
States, which was adversely impacted by the decline in drilling activity levels.
On a product basis, lower tubular revenues associated with a decline in unit
sales and increased competitive pricing pressures contributed to the majority of
the revenue decrease from 1997.
14
<PAGE> 16
For the periods indicated, the following table summarizes the
results of operations of the Company and presents these results as a percentage
of total revenues (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues ................................ $ 1,806,153 100 $ 2,118,715 100 $ 2,167,952 100
----------- ----------- ----------- ---------- ----------- ----------
Gross profit ............................ 467,940 26 629,059 30 652,599 30
Operating expenses ...................... 402,407 22 421,250 20 403,653 19
Non-recurring items ..................... (83,999) (4) 82,500 4 -- --
----------- ----------- ----------- ---------- ----------- ----------
Income before interest and taxes ........ 149,532 8 125,309 6 248,946 11
Interest expense, net ................... 38,773 2 43,371 2 28,991 1
----------- ----------- ----------- ---------- ----------- ----------
Income before income taxes and minority
interests ............................ 110,759 6 81,938 4 219,955 10
Income tax provision .................... 47,865 3 26,279 1 59,109 3
----------- ----------- ----------- ---------- ----------- ----------
Income before minority interests ........ 62,894 3 55,659 3 160,846 7
Minority interests ...................... 6,170 -- 21,590 1 39,517 2
----------- ----------- ----------- ---------- ----------- ----------
Net income .............................. $ 56,724 3 $ 34,069 2 $ 121,329 5
=========== =========== =========== ========== =========== ==========
</TABLE>
1999 versus 1998
Total revenues for 1999 decreased $312.6 million, or 15 percent, from
the prior year as high crude oil inventory levels resulted in reduced drilling
and completion activity levels in all geographic regions. The majority of the
revenue decline from 1998 levels was reported in the United States and Latin
America reflecting the decline in exploration and production activity. This
revenue decrease was partially offset by incremental revenues from the ConEmsco
Transaction and, to a lesser extent, increased sales associated with the new
drilling fluids joint venture. On a product basis, reductions in tubular sales,
due to the divestiture of Wilson's OCTG operations as well as the decline in
activity, accounted for over one-third of the revenue variance between periods.
Gross profit as a percentage of revenues decreased to 26 percent in
1999 from 30 percent in 1998. The decrease reflects the impact of lower revenues
on fixed cost coverage, with reduced manufacturing volumes and rental tool
utilization contributing to the majority of the overall margin decline. To a
lesser extent, competitive pricing pressures in certain markets in which the
Company participates and an increased proportion of distribution revenues, which
traditionally generate lower profit margins, have contributed to the decline in
gross profit margins. The Company's overall gross profit in 2000 is expected to
increase on a dollar basis due to the impact of improved drilling activity and
acquired operations, however, on a margin basis, may not reach levels reported
prior to 1999 due to the higher proportion of distribution revenues.
Operating expenses, consisting of selling, general and administrative
expenses, decreased $18.8 million, or four percent, from the prior fiscal year.
Reductions in costs associated with lower volumes, including reduced headcount
levels and other cost control measures implemented in response to activity level
declines experienced in 1998, were partially offset by incremental costs
associated with the acquired operations.
During 1999, the Company recognized a non-recurring gain of $81.4
million associated with the M-I Transaction. The non-recurring gain is presented
net of transaction-related charges, including resulting profit-sharing and
incentive requirements, assessed fines, professional fees and other related
expenses. Additionally, the Company recorded a non-recurring net gain of $2.6
million in 1999 related to a gain on disposal of an industrial bentonite mining
operation which was partially offset by unrelated charges to write-off certain
assets and settle a customer receivable. During 1998, the Company recorded
charges related to restructuring efforts and costs associated with the
acquisition and integration of the Wilson operations. See Note 3, "Non-Recurring
Items," for further discussion of these items.
15
<PAGE> 17
Net interest expense, which represents interest expense less interest
income, decreased $4.6 million from 1998. Proceeds from the M-I Transaction and,
to a lesser extent, cash flow from operations were used to repay outstanding
indebtedness, resulting in the interest expense reduction. Incremental interest
expense associated with the August 1998 purchase of Halliburton Company's
("Halliburton") minority ownership interest in M-I partially offset the
decrease.
The effective tax rate for 1999 approximated 43 percent, which was an
increase from the 32 percent effective rate reported in 1998 and higher than the
U.S. statutory rate. The rate exceeded the statutory rate due primarily to the
inclusion of non-deductible costs associated with the M-I Transaction and the
sale of one of the Company's international mining operations. The variance from
the 1998 effective rate reflects primarily higher M-I U.S. partnership earnings
in 1998 for which the Company's minority interest partner was responsible for
the respective portion of income taxes.
Minority interests reflect the portion of the results of majority-owned
operations which are applicable to the minority interest partners. Minority
interests decreased $15.4 million from the prior year, primarily reflecting the
lower profitability of the M-I operations.
1998 Versus 1997
Total revenues for 1998 decreased $49.2 million, or two percent, from
1997 as weak oil prices affected drilling activity levels across all geographic
regions. The revenue decline was reported in the United States and related to
the effects of lower land-based drilling activity, which is generally more
sensitive to energy price levels. Increased demand in geographic regions outside
the United States served to partially offset the reported revenue decline. On a
product basis, the overall decrease related to lower tubular sales in the Wilson
operations which was associated with the activity level decline.
Gross profit declined $23.5 million, or four percent, from the 1997
fiscal year. Gross profit margins were comparable year to year approximating 30
percent in both periods. On an absolute dollar basis, the majority of the gross
profit decline related to recording inventory write-downs in the fourth quarter
of 1998 due to the effects of the downturn in the oil and gas industry.
Decreased manufacturing volumes associated with the revenue decline had a
minimal impact on the reported margins in 1998.
Operating expenses, consisting of selling, general and administrative
expenses, increased $17.6 million, or four percent, from the prior fiscal year.
The increase reflects primarily incremental costs associated with acquired
operations and changes in compensation and benefit programs to maintain industry
competitive levels.
During 1998, management evaluated the economic conditions in the oil
and gas industry and committed to several restructuring initiatives to lower
costs and remain competitive in the environment. The merger and restructuring
costs included efforts to reduce the number of employees to appropriate levels
to correspond with activity declines, close and consolidate manufacturing
facilities, exit product offerings, combine business units and eliminate
duplicate cost structures and write-off assets which, due to industry and
economic conditions, were determined to have no future value. In addition to the
restructuring costs, certain amounts were recognized to consolidate and
integrate the Wilson operations. The restructuring efforts, which were
substantially completed in the first quarter of 1999, have resulted in reduced
employee-related costs. Additionally, although headcount reductions associated
with the relocation of the manufacturing facilities resulted in lower
employee-related costs, increased efficiencies have also resulted from the
combination of the previously separate manufacturing operations. As of December
31, 1998, the remaining reserve for restructuring expenditures approximated
$36.3 million. All expenditures for this provision, which was used as intended,
were made as of December 31, 1999. See Note 3, "Non-Recurring Items," for
further discussion of the merger and restructuring costs.
16
<PAGE> 18
Net interest expense, which represents interest expense less interest
income, increased $14.4 million over the prior year. A significant portion of
the increase relates to the notional interest recorded on the note issued to
Halliburton in connection with the purchase of its partnership interest in M-I.
The remainder of the increase relates to the higher level of borrowings required
to fund other business acquisitions and finance general working capital needs.
The effective tax rate for the year approximated 32 percent, which is
higher than the prior year's effective rate and lower than the U.S. statutory
rate. The rate was higher than the prior year's effective rate due to the
inclusion of non-deductible costs in the merger and restructuring charges. The
effective tax rate was lower than the statutory rate which primarily related to
the utilization of foreign tax losses and U.S. minimum tax credits.
Minority interests represent the share of M-I's profits associated with
the former minority partner's interest in those operations and, to a lesser
extent, minority interests in investments in other joint ventures held by M-I.
Minority interests decreased $17.9 million, or 45 percent, from the prior year
due to the impact of acquiring Halliburton's ownership interest in M-I.
LIQUIDITY AND CAPITAL RESOURCES
General
Cash and cash equivalents increased $1.4 million during the year and
equaled $24.1 million at December 31, 1999. The Company's operations generated
$68.7 million of cash flows in 1999 which is a $55.3 million decrease from the
amount generated in 1998. The decline in profitability of operations before
non-recurring items from 1998 was the primary component of the reported variance
and was partially offset by a significant reduction in inventory levels for base
operations in response to the decline in activity.
In 1999, the Company invested $38.9 million in property, plant and
equipment net of cash proceeds arising from certain asset disposals. Capital
expenditures for 2000 are expected to increase from 1999 levels due to the
recent improvement in exploration and production activity, but should remain
well below 1998 levels. Capital spending in 2000 is expected to consist of
spending for routine additions of property and equipment used to support the
Company's operations and maintenance of the Company's capital equipment base.
The Company believes funds generated from operations, cash on hand and amounts
available under existing credit facilities will be sufficient to finance capital
expenditures and other working capital needs of the existing operations for the
foreseeable future.
The Company received cash of $314.7 million in connection with the M-I
Transaction. In addition, the Company received cash of $44.2 million in
connection with the disposal of certain of its mining operations and Wilson's
OCTG operations. The Company funded $305.3 million related to business
acquisitions during 1999. Cash flows from operations and the sale of interest in
certain operations for the year were sufficient to fund capital expenditures and
acquisition requirements resulting in repayments of borrowings under available
facilities.
Subsequent to December 31, 1999, the Company acquired Texas Mill Supply
and Manufacturing, Inc., a provider of industrial mill and safety products and
inventory management services to the refining, power generation, petrochemical
and chemical markets, with borrowings under existing credit facilities.
Management continues to evaluate opportunities to acquire products or businesses
complementary to the Company's operations. These acquisitions, if they arise,
may involve the use of cash or, depending upon the size and terms of the
acquisition, may require debt or equity financing.
The Company's primary internal source of liquidity is cash flow
generated from operations. External sources of liquidity include debt and, if
needed, equity financing. The Company has various revolving line-of-credit
facilities in and outside the United States for operating and financing needs.
The Company had approximately $158 million of funds available under its
long-term revolving line-of-credit facilities at December 31, 1999.
Additionally, the Company had approximately $79 million of non-U.S. borrowing
facilities with various banks which had available borrowing capacity of
approximately $33 million at year-end.
17
<PAGE> 19
On October 29, 1996, the Company was served with a complaint in the
United States District Court in Houston, Texas entitled Rock Bit International,
Inc. v. Smith International, Inc. which alleged that drill bits made by the
Company infringed a U.S. patent owned by Rock Bit International ("RBI"). On
September 30, 1999, the United States District Court granted the Company's
motion for summary judgement and entered a Final Judgement holding the asserted
claims of the RBI patent invalid. On November 30, 1999, the Court awarded the
Company all of its attorneys' fees and costs. RBI appealed the Final Judgement
and the award of fees and costs. Subsequent to year-end, Smith and RBI reached a
final settlement whereby RBI abandoned its appeals, paid certain cash
consideration and gave the Company a release and license under all current
inventions, patent applications and patents.
On July 27, 1999, the United States Department of Justice filed
petitions with the United States District Court in Washington, D.C., which
alleged civil and criminal contempt in connection with the formation of the
Company's drilling fluids joint venture. The petitions alleged that the Company
and Schlumberger violated a Consent Decree and Final Order issued in 1994 in
United States v. Baroid Corporation. The Company agreed to be bound by the
Consent Decree in connection with the purchase of the majority ownership
interest in M-I in April 1994. On December 9, 1999, the Company and Schlumberger
entered into a settlement agreement with the Department of Justice as to the
civil contempt petition and agreed to pay a civil fine in the total amount of
$13.1 million. The Department of Justice agreed that it would support the
Company's request to modify the Consent Decree to permit the transaction. The
criminal contempt claim was submitted to the Court. On December 9, 1999, the
Court found the companies in criminal contempt and fined each company $750,000,
which the companies elected not to appeal. On December 22, 1999, the Company
filed a motion to modify the Consent Decree. Subsequent to year-end, the Company
was granted a modification of the Consent Decree and paid its portion of the
civil and criminal fines which aggregated $7.5 million.
The Company has been named as a potentially responsible party in
connection with three sites on the U.S. Environmental Protection Agency's
National Priorities List. At December 31, 1999, the recorded liability for
estimated future clean-up costs for the Superfund as well as other environmental
sites was $3.9 million. As more information becomes available, the Company may
be required to provide for additional environmental clean-up costs. Management,
however, believes that none of these obligations will result in liabilities
having a material adverse effect on the Company's consolidated financial
position or results of operations. See Note 14, "Commitments and Contingencies"
for further discussion of environmental liabilities.
The Company believes that it has sufficient existing manufacturing
capacity to meet current demand for its products and services. Additionally,
inflation has not had a material effect on the Company in recent years, and is
expected to have a modest impact on the operations in the foreseeable future.
The Company has generally been able to offset most of the effects of inflation
through productivity gains, cost reductions and price increases.
NEW ACCOUNTING AND REGULATORY PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities", which, as amended, is effective
for fiscal years beginning after June 15, 2000. This standard establishes
accounting and reporting standards requiring that every derivative instrument be
recorded and measured at its fair value. See Note 7, "Financial Instruments,"
for further discussion of fair value of hedging instruments. SFAS No. 133
requires that changes in fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. The Company has not yet quantified
the effects of adopting SFAS No. 133 on its financial statements.
YEAR 2000
The Company has implemented modifications to its business systems in
order to achieve Year 2000 date conversion compliance without an effect on
customers or business operations. During 1998 and 1999, the Company installed
new applications and upgraded existing ones in order to bring applications into
compliance. The Company believes that all of its systems are Year 2000 compliant
and has not experienced any significant failures of its systems or those of its
vendors. Future Year 2000 non-compliance, if any, is not expected to have a
material effect on the Company's financial position or results of operations.
The costs related to achieving Year 2000 compliance did not have a
material impact on the Company's financial condition or results of operations.
All expenditures related to the Year 2000 initiative were expensed as incurred
and funded with cash flows from operations.
18
<PAGE> 20
QUALITATIVE AND QUANTITATIVE MARKET RISK DISCLOSURES
The Company is exposed to market risks from changes in interest rates
and foreign exchange rates and enters into various hedging transactions to
mitigate these risks. The Company does not use financial instruments for trading
or speculative purposes. See Note 7, "Financial Instruments," for additional
discussion of hedging instruments.
The Company's exposure to interest rate changes is managed through the
use of a combination of fixed and floating rate debt and by entering into
interest rate swaps on a portion of its long-term borrowings. The fair value of
interest rate swaps as of December 31, 1999 and 1998 was not material. At
December 31, 1999, after considering the effect of interest rate swaps, 12
percent of the Company's long-term debt carried a variable interest rate.
Management believes that significant interest rate changes will not have a
material near-term impact on the Company's future earnings or cash flows.
The Company's exposure to changes in foreign exchange rates is managed
primarily through the use of forward exchange contracts. These contracts
increase or decrease in value as foreign exchange rates change, to protect the
value of the underlying transactions denominated in foreign currencies. All
currency contracts are components of the Company's hedging program and are
entered into for the sole purpose of hedging an existing or anticipated currency
exposure. The gains and losses on these contracts offset changes in the value of
the related exposures. In some areas, where hedging is not cost effective, the
Company addresses foreign currency exposure utilizing working capital
management.
The Company utilizes a "Value-at-Risk" ("VAR") model to determine the
maximum potential one-day loss in the fair value of its foreign exchange
sensitive financial instruments. The VAR model estimates were made assuming
normal market conditions and a 95 percent confidence level. The Company's VAR
computations are based on the interrelationships between movements in various
currencies (a "variance/co-variance" technique) during the year. The model
includes all of the Company's foreign exchange derivative contracts. Anticipated
transactions, firm commitments and assets and liabilities denominated in foreign
currencies, which certain of these instruments are intended to hedge, were
excluded from the model. The VAR model is a risk analysis tool and does not
purport to represent actual losses in fair value that will be incurred by the
Company, nor does it consider the potential effect of favorable changes in
market factors. The estimated maximum potential one-day loss in fair value of
currency sensitive instruments, calculated using the VAR model, is not material
to the Company's financial position or results of operations.
19
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Smith International, Inc.:
We have audited the accompanying consolidated balance sheets of Smith
International, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
shareholders' equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Smith
International, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 28, 2000
20
<PAGE> 22
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues ................................................... $ 1,806,153 $ 2,118,715 $ 2,167,952
Costs and expenses:
Costs of revenues ........................................ 1,338,213 1,489,656 1,515,353
Selling expenses ......................................... 310,818 339,097 314,533
General and administrative expenses ...................... 91,589 82,153 89,120
Non-recurring items ...................................... (83,999) 82,500 --
------------ ------------ ------------
Total costs and expenses .............................. 1,656,621 1,993,406 1,919,006
------------ ------------ ------------
Income before interest and taxes ........................... 149,532 125,309 248,946
Interest expense ........................................... 40,823 45,986 31,175
Interest income ............................................ (2,050) (2,615) (2,184)
------------ ------------ ------------
Income before income taxes and minority interests .......... 110,759 81,938 219,955
Income tax provision ....................................... 47,865 26,279 59,109
------------ ------------ ------------
Income before minority interests ........................... 62,894 55,659 160,846
Minority interests ......................................... 6,170 21,590 39,517
------------ ------------ ------------
Net income ................................................. $ 56,724 $ 34,069 $ 121,329
============ ============ ============
Earnings per share:
Basic .................................................... $ 1.17 $ 0.71 $ 2.55
============ ============ ============
Diluted .................................................. $ 1.15 $ 0.70 $ 2.52
============ ============ ============
Weighted average shares outstanding:
Basic .................................................... 48,586 47,909 47,504
============ ============ ============
Diluted .................................................. 49,190 48,341 48,083
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 23
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 24,127 $ 22,717
Receivables, less allowance for doubtful accounts of $9,636 and $10,437
in 1999 and 1998, respectively ............................................ 474,114 424,054
Inventories ............................................................... 497,414 465,705
Deferred tax assets, net .................................................. 38,954 48,509
Prepaid expenses and other ................................................ 20,171 36,170
------------ ------------
Total current assets .................................................... 1,054,780 997,155
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land ...................................................................... 25,119 27,019
Buildings ................................................................. 87,024 72,560
Machinery and equipment ................................................... 365,360 348,131
Rental tools .............................................................. 219,118 211,871
------------ ------------
696,621 659,581
Less - Accumulated depreciation ........................................... 315,539 284,345
------------ ------------
Net property, plant and equipment ......................................... 381,082 375,236
------------ ------------
GOODWILL, net of accumulated amortization of $26,985 and $18,251 in
1999 and 1998, respectively .................................................. 349,773 289,242
OTHER ASSETS ................................................................. 108,940 97,355
------------ ------------
TOTAL ASSETS ................................................................. $ 1,894,575 $ 1,758,988
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 24
SMITH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998
------------ ------------
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt .................. $ 50,784 $ 345,253
Accounts payable ............................................................. 218,551 145,338
Accrued payroll costs ........................................................ 62,729 46,296
Income taxes payable ......................................................... 17,468 32,402
Accrued merger and restructuring costs ....................................... -- 36,299
Other ........................................................................ 107,786 87,712
------------ ------------
Total current liabilities .................................................. 457,318 693,300
------------ ------------
LONG-TERM DEBT ................................................................. 346,647 368,823
DEFERRED TAX LIABILITIES ....................................................... 37,098 29,421
OTHER LONG-TERM LIABILITIES .................................................... 15,037 23,903
MINORITY INTERESTS ............................................................. 318,255 9,507
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000 shares authorized; no shares issued
or outstanding in 1999 or 1998 ............................................. -- --
Common stock, $1 par value; 60,000 shares authorized; 49,586 shares
issued in 1999 (48,793 in 1998) ............................................ 49,586 48,793
Additional paid-in capital ................................................... 351,397 323,056
Retained earnings ............................................................ 337,509 280,785
Cumulative translation adjustments ........................................... (10,570) (10,898)
Less - treasury securities, at cost; 656 common shares in 1999 and 1998 ...... (7,702) (7,702)
------------ ------------
Total shareholders' equity ................................................. 720,220 634,034
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $ 1,894,575 $ 1,758,988
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 25
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL CUMMULATIVE
NUMBER PAID-IN RETAINED TRANSLATION
OF SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ....................... 48,056,578 $ 48,057 $ 293,306 $ 125,855 $ (5,247)
Comprehensive income:
Net income ..................................... -- -- -- 121,329 --
Currency translation adjustments ............... -- -- -- -- (6,253)
---------- ---------- ---------- ---------- ----------
Comprehensive income ............................. -- -- -- 121,329 (6,253)
---------- ---------- ---------- ---------- ----------
Exercise of stock options ........................ 159,021 159 3,817 -- --
Cash dividends to Wilson shareholders ............ -- -- -- (375) --
Treasury stock purchases of business acquired .... -- -- (901) -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 ....................... 48,215,599 48,216 296,222 246,809 (11,500)
Comprehensive income:
Net income ..................................... -- -- -- 34,069 --
Currency translation adjustments ............... -- -- -- -- 602
---------- ---------- ---------- ---------- ----------
Comprehensive income ............................. -- -- -- 34,069 602
---------- ---------- ---------- ---------- ----------
Shares issued in connection with business
combination .................................... 542,198 542 25,958 -- --
Exercise of stock options and stock grants ....... 35,186 35 876 -- --
Cash dividends to Wilson shareholders ............ -- -- -- (93) --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 ....................... 48,792,983 48,793 323,056 280,785 (10,898)
Comprehensive income:
Net income ..................................... -- -- -- 56,724 --
Currency translation adjustments ............... -- -- -- -- 328
---------- ---------- ---------- ---------- ----------
Comprehensive income ............................. -- -- -- 56,724 328
---------- ---------- ---------- ---------- ----------
Shares issued in connection with business
combination .................................... 548,527 549 23,176 -- --
Exercise of stock options and stock grants ....... 244,401 244 5,165 -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 ....................... 49,585,911 $ 49,586 $ 351,397 $ 337,509 $ (10,570)
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
TREASURY SECURITIES
-----------------------
COMMON STOCK
----------------------- TOTAL
NUMBER OF SHAREHOLDERS'
SHARES AMOUNT EQUITY
---------- ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1996 ....................... (655,854) $ (7,702) $ 454,269
Comprehensive income:
Net income ....................................... -- -- 121,329
Currency translation adjustments ................. -- -- (6,253)
---------- ---------- ----------
Comprehensive income ............................. -- -- 115,076
---------- ---------- ----------
Exercise of stock options ........................ -- -- 3,976
Cash dividends to Wilson shareholders ............ -- -- (375)
Treasury stock purchases of business acquired .... -- -- (901)
---------- ---------- ----------
Balance, December 31, 1997 ....................... (655,854) (7,702) 572,045
Comprehensive income:
Net income ....................................... -- -- 34,069
Currency translation adjustments ................. -- -- 602
---------- ---------- ----------
Comprehensive income ............................. -- -- 34,671
---------- ---------- ----------
Shares issued in connection with business
combination ................................... -- -- 26,500
Exercise of stock options and stock grants ....... -- -- 911
Cash dividends to Wilson shareholders ............ -- -- (93)
---------- ---------- ----------
Balance, December 31, 1998 ....................... (655,854) (7,702) 634,034
Comprehensive income:
Net income ....................................... -- -- 56,724
Currency translation adjustments ................. -- -- 328
---------- ---------- ----------
Comprehensive income ............................. -- -- 57,052
---------- ---------- ----------
Shares issued in connection with business
combination ................................... -- -- 23,725
Exercise of stock options and stock grants ....... -- -- 5,409
---------- ---------- ----------
Balance, December 31, 1999 ....................... (655,854) $ (7,702) $ 720,220
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 26
SMITH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 56,724 $ 34,069 $ 121,329
Adjustments to reconcile net income to net cash
provided by operating activities, excluding the
net effects of purchase acquisitions:
Depreciation and amortization .................................. 76,037 70,316 58,553
Minority interests ............................................. 6,170 21,590 39,517
Non-recurring items, net of tax ................................ (45,233) 65,777 --
Provision for losses on receivables ............................ 2,029 3,016 2,976
Increase (decrease) in LIFO inventory reserves ................. 1,571 (1,013) 3,816
Gain on disposal of property, plant and equipment .............. (7,052) (9,380) (7,642)
Foreign currency translation losses ............................ 879 1,207 138
Changes in operating assets and liabilities:
Receivables ...................................................... (12,915) 82,576 (118,932)
Inventories, net ................................................. 48,777 (9,513) (83,255)
Accounts payable ................................................. 19,695 (62,324) 22,036
Accrued merger and restructuring costs ........................... (33,337) (35,396) --
Other current assets and liabilities ............................. (37,611) (21,741) (12,431)
Other non-current assets and liabilities ......................... (7,025) (15,129) 12,786
------------ ------------ ------------
Net cash provided by operating activities .................... 68,709 124,055 38,891
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from M-I Transaction ...................................... 314,652 -- --
Proceeds from disposal of operations ............................... 44,218 -- --
Acquisition of businesses, net of cash acquired .................... (305,297) (34,685) (80,656)
Purchases of property, plant and equipment ......................... (57,174) (119,204) (113,146)
Proceeds from disposal of property, plant and equipment ............ 18,322 16,443 14,467
------------ ------------ ------------
Net cash provided by (used in) investing activities .......... 14,721 (137,446) (179,335)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt ........................... 76,485 25,843 367,549
Principal payments of long-term debt ............................... (125,678) (29,380) (251,303)
Net change in short-term borrowings ................................ (34,719) (1,044) 10,153
Proceeds from exercise of stock options and warrants ............... 2,975 548 1,794
Purchases of treasury stock ........................................ -- -- (901)
Cash dividends to Wilson shareholders .............................. -- (93) (375)
Contributions from (distribution to) minority interest partners .... (1,440) 2,712 16,092
------------ ------------ ------------
Net cash provided by (used in) financing activities .......... (82,377) (1,414) 143,009
------------ ------------ ------------
Effect of exchange rate changes on cash .............................. 357 413 (774)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ..................... 1,410 (14,392) 1,791
Cash and cash equivalents at beginning of year ....................... 22,717 37,109 35,318
------------ ------------ ------------
Cash and cash equivalents at end of year ............................. $ 24,127 $ 22,717 $ 37,109
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 27
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS ARE EXPRESSED IN THOUSANDS, UNLESS OTHERWISE NOTED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Smith International, Inc. (the "Company") is engaged in the manufacture
and sale of premium products and services to customers in the oil and gas
industry. The consolidated financial statements include the accounts of the
Company and all wholly and majority-owned subsidiaries. Investments in
affiliates in which ownership interest ranges from 20 to 50 percent, and the
Company exercises significant influence over operating and financial policies,
are accounted for on the equity method. All other investments are carried at
cost, which does not exceed the estimated net realizable value of such
investments. All significant intercompany accounts and transactions have been
eliminated.
On April 30, 1998, the Company acquired all of the equity interests in
Wilson Industries, Inc. ("Wilson") in a transaction accounted for as a
pooling-of-interests. Accordingly, the consolidated financial statements for all
periods presented include the accounts of Wilson.
Use of Estimates
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosed amounts of contingent assets and liabilities and the reported amounts
of revenues and expenses. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased
with an original maturity of three months or less to be cash equivalents.
Fixed Assets
Fixed assets, consisting of rental equipment and property, plant and
equipment, are stated at cost. The Company computes depreciation on fixed assets
using principally the straight-line method. The estimated useful lives used in
computing depreciation generally range from 20 to 40 years for buildings, three
to 25 years for machinery and equipment, and five to seven years for rental
equipment. Leasehold improvements are amortized over the lives of the leases or
the estimated useful lives of the improvements, whichever is shorter. For income
tax purposes, accelerated methods of depreciation are used.
Costs of major renewals and betterments are capitalized as fixed
assets. Expenditures for maintenance, repairs and minor improvements are charged
to expense when incurred. When fixed assets are sold or retired, the remaining
cost and related reserves are removed from the accounts and the resulting gain
or loss is included in the Consolidated Statements of Operations.
Valuation of Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out ("FIFO") method for the majority of the
Company's inventories. The remaining inventories are costed under the last-in,
first-out ("LIFO") or average cost methods. Inventory costs consist of
materials, labor and factory overhead.
Goodwill
Goodwill, which represents the excess of costs over the fair value of
net assets acquired, is amortized on a straight-line basis over 40 years. The
Company continually evaluates whether subsequent events or circumstances have
occurred that indicate the remaining useful life of goodwill may warrant
revision or that the remaining balance of goodwill may not be recoverable.
Management believes that there have been no events or circumstances which
warrant revision to the remaining useful life or which affect the recoverability
of goodwill.
26
<PAGE> 28
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Foreign Currency Translation and Transactions
Gains and losses resulting from balance sheet translation of operations
outside the United States where the applicable foreign currency is the
functional currency are included as a separate component of shareholders'
equity. Gains and losses resulting from balance sheet translation of operations
outside the United States where the U.S. dollar is the functional currency are
included in the Consolidated Statements of Operations.
All foreign currency transaction gains and losses are recognized
currently in the Consolidated Statements of Operations.
Financial Instruments
The Company enters into various instruments, including derivatives, to
manage interest rate and foreign exchange risks. Derivatives are limited in use
and are not entered into for speculative purposes. The instruments are
classified as for "purposes other than trading" under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments."
The Company enters into interest rate swaps to manage interest rate
risk on a portion of its long-term borrowings. The differential to be received
or paid is accrued, as interest rates change, and recognized currently in the
Consolidated Statements of Operations.
The Company enters into foreign exchange contracts to hedge certain
foreign currency denominated assets or liabilities and currency commitments.
Gains and losses on foreign exchange contracts are recognized currently and are
generally offset by gains or losses on the related assets or liabilities. If the
transaction qualifies as a hedge, the resulting gains and losses are deferred.
Environmental Obligations
Expenditures for environmental obligations that relate to current
operations are expensed or capitalized, as appropriate. Expenditures that relate
to an existing condition caused by past operations and which do not contribute
to current or future revenue generation are expensed. Liabilities are recorded
when remedial efforts are probable and the costs can be reasonably estimated.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This standard requires an asset and liability
approach for financial accounting and income tax reporting based on enacted tax
rates.
Revenue Recognition
The Company's revenues are composed of product sales, rental, service
and other revenues. The Company recognizes product sales revenues upon delivery
to the customer. Rental, service and other revenues are recorded when such
services are performed.
Minority Interests
The Company records minority interest expense which reflects the
portion of the earnings of majority-owned operations which are applicable to the
minority interest partners. The minority interest amount primarily represents
the share of M-I L.L.C. ("M-I") profits associated with the minority partners'
interests in those operations. To a lesser extent, minority interests in 1999
include the portion of CE Franklin Ltd. earnings applicable to its public
shareholders.
Reclassifications
Certain prior year amounts have been reclassified to conform to current
year presentation.
27
<PAGE> 29
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which, as
amended, is effective for fiscal years beginning after June 15, 2000. This
standard establishes accounting and reporting standards requiring that every
derivative instrument be recorded and measured at its fair value. SFAS No. 133
requires that changes in fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Note 7 presents the fair value of
derivatives held by the Company. The Company has not yet quantified the effects
of adopting SFAS No. 133 on its financial statements.
2. BUSINESS COMBINATIONS
Acquisition of Tri-Tech Fishing Services, L.L.C.
On April 16, 1997, the Company acquired all of the equity interests in
Tri-Tech Fishing Services, L.L.C. ("Tri-Tech") in exchange for consideration
totaling approximately $20.4 million. Tri-Tech is a supplier of fishing and
other downhole remedial products and services to the U.S. Gulf Coast area.
Acquisition of Fleming Oilfield Services, Ltd.
On October 16, 1997, the Company acquired all of the outstanding shares
of Fleming Oilfield Services, Ltd. ("Fleming") in exchange for cash of
approximately $17.3 million. Fleming is a Calgary, Alberta based supplier of
drilling fluids products and services to the Canadian oil and gas industry.
Acquisition of Safeguard Disposal Systems, Inc.
On May 27, 1998, the Company acquired all of the outstanding shares of
Safeguard Disposal Systems, Inc. ("Safeguard"), a company engaged in the rental
of vacuum and collection systems used in the oil and gas industry. The Company
issued stock and cash consideration totaling $42.7 million in exchange for the
equity interests of Safeguard and M-I acquired other Safeguard-related assets
for $4.8 million. Subsequent to the acquisition date, the Company contributed
the Safeguard assets to M-I partly in exchange for a $16.6 million contribution
from the former minority interest partner.
Acquisition of Minority Interest in M-I
On August 31, 1998, the Company acquired the remaining 36 percent
interest in M-I previously held by Halliburton Company ("Halliburton"). The
Company issued a $265.0 million non-interest bearing promissory note to
Halliburton in exchange for their minority ownership interest. The discounted
value of the note, which matured and was repaid on April 28, 1999, was
classified as short-term borrowings in the accompanying balance sheet at
December 31, 1998.
28
<PAGE> 30
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Acquisition of ConEmsco, Inc. and CE Franklin Ltd.
On May 28, 1999, the Company acquired certain operations of ConEmsco,
Inc. ("CE"), and CE's majority ownership interest in CE Franklin Ltd.,
businesses primarily engaged in oilfield supply and distribution in the United
States and Canada. In connection with the acquisition, the Company issued
548,527 shares of common stock and a $30.0 million note payable to the seller
which was subsequently repaid.
Formation of Drilling Fluids Venture
On July 25, 1999, the Company completed a transaction with Schlumberger
Limited ("Schlumberger") related to the combination of certain M-I and Dowell
drilling fluid operations under a joint venture arrangement. Schlumberger
contributed its non-U.S. Dowell drilling fluid operations, including an asset
equalization payment of $34.7 million, and paid cash consideration of $280
million to the Company in exchange for a 40 percent minority ownership interest
in the combined operations (collectively, the "M-I Transaction"). Proceeds from
the transaction were used to reduce outstanding borrowings of the Company. See
Note 3 for a discussion of the gain recognized in connection with the M-I
Transaction.
Other Acquisitions
In 1999, the Company completed the purchase of various other
operations. These operations were acquired in exchange for cash of $8.8 million
which was financed with borrowings against available lines of credit.
Additionally, several other acquisitions were completed in 1998 and 1997 in
exchange for consideration of $20.5 million and $43.0 million, respectively.
These acquisitions have generally been financed with cash, new term loans or
borrowings against available lines of credit.
The above acquisitions have been recorded using the purchase method of
accounting and, accordingly, the acquired operations have been included in the
results of operations since their respective acquisition dates. The purchase
price was allocated to the net assets acquired based upon their estimated fair
market values at the dates of acquisition. The excess of the purchase price over
the estimated fair value of the net assets acquired amounted to approximately
$68.6 million in 1999 and $86.4 million in 1998, which has been recorded as
goodwill.
The balances included in the Consolidated Balance Sheets related to the
current year acquisitions are based upon preliminary information and are subject
to change when additional information concerning final asset and liability
valuations is obtained. Material changes in the preliminary allocations are not
anticipated by management.
The following unaudited pro forma supplemental information presents
consolidated results of operations as if the Company's current and prior year
acquisitions had occurred on January 1, 1998 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Revenues ............................... $ 2,036,923 $ 2,791,983
Net income ............................. 4,797 54,007
Earnings per share:
Basic ...................... $ 0.10 $ 1.11
Diluted .................... 0.10 1.10
</TABLE>
As discussed in Note 3, the Company recognized an after-tax,
non-recurring gain of $45.0 million, or $0.91 per diluted share, in connection
with the M-I Transaction which is excluded from the unaudited pro forma
supplemental information. The information above includes non-recurring charges
recognized in 1998 related to restructuring efforts and costs associated with
the acquisition and integration of Wilson. The unaudited pro forma supplemental
information is based on historical information and does not include estimated
cost savings; therefore, it does not purport to be indicative of the results of
operations had the combinations been in effect at the dates indicated or of
future results for the combined entities.
29
<PAGE> 31
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following schedule summarizes investing activities related to
current year acquisitions included in the Consolidated Statements of Cash Flows:
<TABLE>
<S> <C>
Fair value of assets, net of cash acquired ........................... $ 230,305
Goodwill recorded .................................................... 68,597
Note payments related to acquisitions ................................ 295,000
Total liabilities and minority interest assumed ...................... (264,880)
Common stock issued for consideration ................................ (23,725)
------------
Cash paid for acquisition of businesses, net of cash acquired ........ $ 305,297
============
</TABLE>
Acquisition of Wilson Industries, Inc.
On April 30, 1998, the Company merged with Wilson, a Houston, Texas
based provider of products and services to the worldwide petroleum and
petrochemical industries. In connection with the merger, the Company issued a
total of 7.9 million of its shares in exchange for all of the outstanding shares
of common stock of Wilson. The transaction has been accounted for as a pooling
of interests.
The revenues and net income amounts included in the Consolidated
Statements of Operations are disclosed in the following table with Wilson's
amounts for the periods prior to the merger presented separately:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Smith ................................ $ 1,913,438 $ 1,563,144
Wilson ............................... 205,277 604,808
------------ ------------
Combined ............................. $ 2,118,715 $ 2,167,952
============ ============
Net income:
Smith ................................ $ 28,414 $ 102,351
Wilson ............................... 5,655 18,978
------------ ------------
Combined ............................. $ 34,069 $ 121,329
============ ============
</TABLE>
3. NON-RECURRING ITEMS
During the third quarter of 1999, the Company recognized a
non-recurring gain of $81.4 million, or $45.0 million on an after-tax basis,
associated with the M-I Transaction in accordance with the provisions of Staff
Accounting Bulletin No. 51. The non-recurring gain is presented net of
transaction-related charges of $25.4 million, including resulting profit-sharing
and incentive requirements, assessed fines, professional fees and other related
costs. Additionally, in the first quarter of 1999, the Company recorded a
non-recurring net gain of $2.6 million ($0.2 million after-tax) related to a
gain on disposal of an industrial bentonite mining operation which was partially
offset by unrelated charges to write-off certain assets and settle a customer
receivable.
During 1998, the Company recognized special charges totaling $97.4
million, or $65.8 million on an after-tax basis. Of that amount $82.5 million
was recorded as merger and restructuring costs in the accompanying financial
statements and relates to restructuring efforts undertaken in response to
activity-level declines and costs required to consolidate and integrate the
Wilson operations. The remaining $14.9 million of the charge consists of amounts
required to reflect inventories at net realizable value and was recorded in
costs of revenues.
In order to reduce costs and improve productivity, the Company
initiated various restructuring efforts to streamline the organizational
structure, consolidate manufacturing operations and exit certain product line
offerings. These actions resulted in the recognition of $52.5 million of
restructuring charges as reflected below. The restructuring efforts included the
termination of approximately 2,100 individuals across all business operations
and job functions, including manufacturing, sales and administrative positions.
Although certain of the employee reductions related to the combination of two
separate business units and the elimination of duplicate cost structures, the
majority of the reductions were in response to the activity-level declines
associated with the industry downturn. The restructuring charge also included
amounts to close manufacturing
30
<PAGE> 32
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
facilities and exit certain business operations. These amounts included costs
related to the closure and relocation of one of the Company's European
manufacturing operations along with the exit costs for a manufacturing operation
and certain product line offerings which were discontinued due to economic
considerations in Latin America. The remainder of the restructuring charge
related to asset write-offs necessitated by the prevailing economic environment,
including non-recoverable assets recorded in Indonesia and certain assets
located in the United States which had no future value. The restructuring
efforts were substantially completed by the first quarter of 1999.
In connection with the Wilson transaction, the Company recorded merger
costs of approximately $30.0 million which consisted of transaction costs,
including accounting, legal and investment banking costs and amounts to
consolidate and integrate the existing Wilson operations. The remaining portion
of the charge relates to severance costs, including payments required under
"change of control" agreements, amounts incurred to relocate and consolidate two
separate manufacturing operations located in the United States and write-off
certain assets which were determined to have no future value.
The significant components of the charges recorded during 1998 are
included below:
<TABLE>
<S> <C>
Employee terminations and related costs $ 23,719
Facility closure costs and exit costs for certain business operations 15,500
Write-off of certain assets and other miscellaneous costs 13,281
------------
Total restructuring costs 52,500
Merger costs related to the Wilson transaction 30,000
------------
Total merger and restructuring costs 82,500
Write-down of certain inventories 14,900
------------
$ 97,400
============
</TABLE>
As of December 31, 1998, the remaining reserve for merger and
restructuring costs approximated $36.3 million. All expenditures for this
provision, which was used as intended, were made as of December 31, 1999.
4. EARNINGS PER COMMON SHARE
The Company adopted SFAS No. 128 "Earnings per Share," which conforms
the U.S. method of computing earnings per share ("EPS") with international
accounting standards and requires dual presentation of basic and diluted EPS
data. Basic EPS is computed using the weighted average number of common shares
outstanding during the period. Diluted EPS gives effect to the potential
dilution of earnings which could have occurred if additional shares were issued
for stock option exercises under the treasury stock method. For purposes of the
EPS computation, the 7.9 million shares issued in connection with the Wilson
transaction have been treated as if they had been issued and outstanding for all
periods presented.
31
<PAGE> 33
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following schedule reconciles the income and shares used in the
basic and diluted EPS computations (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
BASIC EPS:
Net income .................................. $ 56,724 $ 34,069 $ 121,329
========== ========== ==========
Weighted average number of common
shares outstanding ........................ 48,586 47,909 47,504
---------- ---------- ----------
Basic EPS ................................... $ 1.17 $ 0.71 $ 2.55
========== ========== ==========
DILUTED EPS:
Net income .................................. $ 56,724 $ 34,069 $ 121,329
========== ========== ==========
Weighted average number of common
shares outstanding ........................ 48,586 47,909 47,504
Dilutive effect of stock options ............ 604 432 579
---------- ---------- ----------
49,190 48,341 48,083
---------- ---------- ----------
Diluted EPS ................................. $ 1.15 $ 0.70 $ 2.52
========== ========== ==========
</TABLE>
5. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Raw materials .............................................. $ 41,508 $ 43,612
Work-in-process ............................................ 43,498 57,913
Products purchased for resale .............................. 118,786 72,444
Finished goods ............................................. 317,054 313,597
------------ ------------
520,846 487,566
Reserves to state certain U.S. inventories
($227,622 and $221,653 in 1999 and 1998, respectively)
on a LIFO basis .......................................... (23,432) (21,861)
------------ ------------
$ 497,414 $ 465,705
============ ============
</TABLE>
32
<PAGE> 34
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
6. DEBT
The following summarizes the Company's outstanding debt at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
CURRENT:
Short-term note payable............................................................. $ -- $ 259,922
Short-term borrowings............................................................... 28,317 63,036
Current portion of long-term debt................................................... 22,467 22,295
---------- ---------
Short-term borrowings and current portion of long-term debt....................... $ 50,784 $ 345,253
========== =========
LONG-TERM:
Notes:
7% Senior Notes maturing September 2007 with an effective interest
rate of 7.07%. Interest payable semi-annually (presented net of
unamortized discount of $797 and $917 in 1999 and 1998, respectively) .............. $ 149,203 $ 149,083
Notes payable to insurance companies maturing between 2001 and 2006.
Interest payable quarterly or semi-annually at rates ranging from
7.24% to 9.83%...................................................................... 70,444 80,667
7.7% senior secured notes maturing July 2007. Principal due in
equal annual installments of $7.1 million beginning July 2001. Interest
payable semi-annually .............................................................. 50,000 50,000
Bank revolvers payable:
$120.0 million revolving note expiring December 2002. Interest payable
quarterly at base rate (8.50% at December 31, 1999) or adjusted
Eurodollar interbank rate, as defined (6.49% at December
31, 1999) and described below....................................................... 30,300 29,600
M-I L.L.C. $80.0 million revolving note expiring December
2002. Interest payable quarterly at base rate (8.50% at December
31, 1999) or adjusted Eurodollar interbank rate, as defined (6.49%
at December 31, 1999) and described below........................................... 11,900 46,000
CE Franklin Ltd. 58.0 million Canadian dollar secured revolving
facilities expiring February 2001. Interest payable monthly at prime
plus 0.75% to 1.25% (7.35% at December 31, 1999).................................... 25,289 --
Term Loans:
320.0 million Norwegian Krone term loan facility with a bank group.
Principal due in semi-annual installments of 32.0 million Krone through
December 2000, remainder due March 2001. Interest payable semi-annually
at a Eurokrone rate (6.38% at December 31, 1999), ranging from
NIBOR plus 0.38% to 0.75%........................................................... 11,946 21,096
Other............................................................................... 20,032 14,672
---------- ---------
369,114 391,118
Less current portion of long-term debt.............................................. (22,467) (22,295)
---------- ---------
Long-term debt.................................................................... $ 346,647 $ 368,823
========== =========
</TABLE>
33
<PAGE> 35
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Principal payments of long-term debt for years subsequent to 2000 are as
follows:
<TABLE>
<S> <C>
2001..................................... $ 86,488
2002..................................... 61,563
2003..................................... 10,821
2004..................................... 10,476
Thereafter............................... 177,299
---------
$ 346,647
=========
</TABLE>
The Company's short-term borrowings consist of amounts outstanding
under lines of credit and short-term loans. Certain subsidiaries of the Company
have unsecured line-of-credit facilities with banks aggregating $78.6 million.
At December 31, 1999, $33.2 million of additional borrowing capacity was
available under these facilities. These short-term borrowings had a weighted
average interest rate of 11 percent and 13 percent at December 31, 1999 and
1998, respectively.
In addition to the short-term borrowings, the Company also had a
short-term note payable at December 31, 1998, which was issued to Halliburton in
connection with the acquisition of its 36 percent interest in M-I. The $265
million non-interest bearing note was recorded in the accompanying financial
statements at the discounted value prior to repayment in 1999.
At December 31, 1999, the Company had $200 million of unsecured
revolving credit agreements in addition to the short-term facilities discussed
above. These agreements provide for the election of interest at a base rate or a
Eurodollar rate of LIBOR plus 30 basis points and require the payment of a
quarterly commitment fee of one-tenth of one percent of the unutilized credit
facility. The interest and commitment fee percentages are determined based upon
the senior debt rating of the Company, as defined. As of December 31, 1999, the
borrowing capacity under these lines of credit approximated $158 million.
In connection with a public debt offering, the Company issued $150
million of unsecured 7 percent Senior Notes. The notes are redeemable by the
Company, in whole or in part, at any time prior to maturity at a redemption
price equal to accrued interest plus the greater of the principal amount or the
present value of the remaining principal and interest payments.
The Company was in compliance with its loan covenants under the various
loan indentures at December 31, 1999. The indentures relating to its long-term
debt contain certain covenants restricting the payment of cash dividends to the
Company's common shareholders based on net income and operating cash flow
formulas, as defined. The Company has not paid dividends on its common stock
since the first quarter of 1986.
Interest paid during the years ended December 31, 1999, 1998 and 1997,
amounted to $34.0 million, $40.8 million and $27.3 million, respectively.
7. FINANCIAL INSTRUMENTS
Interest Rate Contracts
From time to time, the Company enters into interest rate swaps with the
intent of managing its exposure to interest rate risk. Interest rate swaps are
contractual agreements between two parties for the exchange of interest payments
on a notional principal amount and agreed upon fixed or floating rates, for
defined time periods.
At December 31, 1999 and 1998, the Company had notional principal
amounts of interest rate swaps on outstanding debt of $54.1 million and $71.1
million, respectively. These agreements, which are hedges against certain
obligations, terminate between April 2000 and March 2001. Gains and losses from
interest rate swaps are recognized currently in the Consolidated Statements of
Operations.
In the unlikely event that the counterparty fails to perform under the
contract, the Company bears the credit risk that payments due to the Company may
not be collected.
34
<PAGE> 36
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Foreign Currency Contracts and Options
From time to time, the Company enters into spot and forward contracts
as a hedge against foreign currency denominated assets and liabilities and
currency commitments. The terms of these contracts generally do not exceed one
year. Market value gains and losses are recognized currently, and the resulting
amounts generally offset foreign exchange gains or losses on the related
accounts. Gains or losses on contracts are deferred if the transaction qualifies
as a hedge. At December 31, 1999 and 1998, foreign exchange contracts
outstanding totaled $52.3 million and $40.0 million, respectively.
The Company also purchases foreign exchange option contracts, with
terms which generally do not exceed one year, to hedge certain operating
exposures. Premiums paid under these contracts are expensed over the life of the
option contract. Gains arising on these options are recognized at the time the
options are exercised. The Company had $6.7 million and $5.3 million of foreign
exchange option contracts outstanding at December 31, 1999 and 1998,
respectively.
Fair Value
<TABLE>
<CAPTION>
1999 1998
--------------------- ----------------------
Recorded Fair Recorded Fair
Value Value Value Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Long-term debt................. $369,114 $369,670 $391,118 $392,451
Interest rate swaps............ -- (21) -- (716)
</TABLE>
The fair value of the remaining financial instruments, including cash
and cash equivalents, receivables, payables, short-term debt and foreign
currency contracts, approximates the carrying value due to the short-term nature
of these instruments.
35
<PAGE> 37
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
8. INCOME TAXES
The geographical sources of income before income taxes and minority
interests for the three years ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income before income taxes and minority interests:
United States ................................................. $ 70,463 $ 19,919 $ 141,418
Non-United States ............................................. 40,296 62,019 78,537
------------ ------------ ------------
Total ......................................................... $ 110,759 $ 81,938 $ 219,955
============ ============ ============
The income tax provision is summarized as follows:
1999 1998 1997
------------ ------------ ------------
Current:
United States ............................................... $ 16,266 $ 9,117 $ 28,636
Non-United States ........................................... 9,723 27,955 27,143
State ....................................................... 1,675 2,706 2,277
------------ ------------ ------------
27,664 39,778 58,056
------------ ------------ ------------
Deferred:
United States ............................................... 18,015 (10,301) (3,393)
Non-United States ........................................... 2,186 (3,198) 4,446
------------ ------------ ------------
20,201 (13,499) 1,053
------------ ------------ ------------
Income tax provision .......................................... $ 47,865 $ 26,279 $ 59,109
============ ============ ============
</TABLE>
Deferred taxes are principally attributable to timing differences
related to depreciation expense, restructuring reserves, inventories and net
operating loss ("NOL") and tax credit carryforwards. The Company reported the
tax benefit of operating loss carryforwards utilized in 1998 and 1997 as a
reduction in the provision for income taxes in accordance with SFAS No. 109.
The consolidated effective tax rate (as a percentage of income before
income taxes and minority interests) is reconciled to the U.S. federal statutory
tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. federal statutory tax rate ............................ 35.0% 35.0% 35.0%
Utilization of U.S. net operating
loss and tax credit carryforwards ........................ -- (5.6) (5.0)
Minority partner's share of U.S. partnership earnings ...... (1.6) (6.9) (5.4)
Non-deductible expenses .................................... 5.0 9.0 1.7
Benefit of foreign sales corporation ....................... (0.6) (3.9) --
State taxes, net ........................................... 1.5 3.3 1.2
Non-U.S. tax provisions which vary from the
U.S. rate/non-U.S. losses with no
tax benefit realized ..................................... 4.2 2.5 (0.3)
Other items, net ........................................... (0.3) (1.3) (0.3)
-------- -------- --------
Effective tax rate ......................................... 43.2% 32.1% 26.9%
======== ======== ========
</TABLE>
36
<PAGE> 38
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The components of deferred taxes at December 31 are as follows:
<TABLE>
<CAPTION>
NET
1999 1998 CHANGE
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax liabilities attributed to the excess of net book basis over
remaining tax basis (principally depreciation):
United States ................................................................. $ (32,964) $ (24,038) $ (8,926)
Non-United States ............................................................. (18,208) (15,347) (2,861)
------------ ------------ ------------
Total deferred tax liabilities .................................................. (51,172) (39,385) (11,787)
------------ ------------ ------------
Deferred tax assets attributed to net operating loss and tax credit
carryforwards:
United States ................................................................. 10,813 11,064 (251)
Non-United States ............................................................. 36,624 31,791 4,833
Other deferred tax assets (principally accrued liabilities not deductible until
paid):
United States ................................................................. 48,061 56,131 (8,070)
Non-United States ............................................................. 5,317 6,738 (1,421)
------------ ------------ ------------
Subtotal .................................................................... 100,815 105,724 (4,909)
Valuation allowance ............................................................... (33,646) (38,284) 4,638
------------ ------------ ------------
Subtotal deferred tax assets .................................................... 67,169 67,440 (271)
------------ ------------ ------------
Net deferred tax assets ......................................................... $ 15,997 $ 28,055 $ (12,058)
============ ============ ============
Balance sheet presentation:
Deferred tax assets, net ........................................................ $ 38,954 $ 48,509 $ (9,555)
Other assets .................................................................... 16,174 9,757 6,417
Other current liabilities ....................................................... (2,033) (790) (1,243)
Deferred tax liabilities ........................................................ (37,098) (29,421) (7,677)
------------ ------------ ------------
Net deferred tax assets ...................................................... $ 15,997 $ 28,055 $ (12,058)
============ ============ ============
</TABLE>
At December 31, 1999, alternative minimum tax credits of $1.7 million,
with no expiration, and foreign tax credits of $9.1 million, which will expire
in 2004, are available to reduce future U.S. income taxes. For U.S. tax
reporting purposes, the Company utilized all cumulative NOL and investment and
other business credits available during 1997. Total foreign operating loss
carryforwards at December 31, 1999, are approximately $36.6 million, of which
$24.2 million have been offset by recording a valuation reserve. These losses
are available to reduce the future tax liabilities of their respective foreign
entities. Approximately $16.9 million of these losses will carryforward
indefinitely, while the remaining losses expire at various dates.
Income taxes paid during the years ended December 31, 1999, 1998 and
1997, amounted to $33.7 million, $40.7 million and $49.3 million, respectively.
The Company has provided additional taxes for the anticipated
repatriation of certain earnings of its non-U.S. subsidiaries. Undistributed
earnings above the amounts upon which additional taxes have been provided, which
approximated $35.8 million at December 31, 1999, are intended to be permanently
invested by the Company. It is not practicable to determine the amount of
applicable taxes that would be incurred if any of such earnings were
repatriated.
37
<PAGE> 39
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
9. STOCKHOLDERS' RIGHTS PLAN
During 1990, the Company adopted a Stockholders' Rights Plan ("Rights
Plan"). As part of the Rights Plan, the Company's Board of Directors declared a
dividend of one preferred stock purchase right ("Right") for each share of the
Company's common stock outstanding on June 29, 1990. The Board also authorized
the issuance of one such Right for each share of the Company's common stock
issued after June 29, 1990 until the occurrence of certain events.
Each Right entitles the holder thereof (except an Acquiring Person) to
purchase, at an exercise price of $50, shares of the Company's common stock
having a market value of twice the Right's exercise price. The Rights are
exercisable upon the occurrence of certain events related to a person acquiring
or announcing the intention to acquire beneficial ownership of 20 percent or
more of the Company's common stock. The Rights are not exercisable in the event
the Company's common stock is acquired pursuant to a Qualifying Offer, as
defined in the Rights Plan. In addition, if the Company is involved in a merger
or other business combination transaction, or sells 50 percent or more of its
assets or earning power to another entity, each Right will entitle its holder to
purchase, at the Right's then current exercise price, shares of common stock of
such other entity having a value of twice the Right's exercise price.
The Rights are subject to redemption at the option of the Board of
Directors at a price of $0.01 per Right until the occurrence of certain events.
The Rights currently trade with the Company's common stock, have no voting or
dividend rights and expire on June 19, 2000.
10. EMPLOYEE STOCK OPTIONS
As of December 31, 1999, the Company had outstanding stock options
granted under the 1989 Long-Term Incentive Compensation Plan ("1989 Plan").
Options are generally granted at the fair market value on the date of grant with
matters such as vesting periods and expiration of options determined on a
grant-by-grant basis. The options, exercisable at various dates through December
2009, are conditioned upon continued employment.
During 1997, all options remaining under the 1982 Stock Option Plan
were exercised or forfeited. No further options may be granted under this Plan.
The Company has adopted the reporting standards of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 established financial
accounting and reporting standards for stock-based employee compensation and for
transactions in which equity instruments are issued to non-employees for the
acquisition of goods and services. This standard requires, among other things,
that compensation cost be calculated for fixed stock options at the grant date
by determining fair value using an option-pricing model. The Company has the
option of recognizing the compensation cost over the vesting period as an
expense in the Consolidated Statements of Operations or making pro forma
disclosures in the notes to the consolidated financial statements. The Company
continues to apply APB Opinion 25 and related interpretations in accounting for
the 1999 Plan and, accordingly, no compensation cost has been recognized in the
accompanying consolidated financial statements. Had the Company elected to apply
the accounting standards of SFAS No. 123, the Company's net income and earnings
per share would have approximated the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income As reported $56,724 $34,069 $121,329
Pro forma 53,575 31,517 120,040
Earnings per share As reported:
Basic
Diluted $ 1.17 $ 0.71 $ 2.55
1.15 0.70 2.52
Pro forma:
Basic
Diluted
$ 1.10 $ 0.66 $ 2.53
1.09 0.65 2.50
</TABLE>
38
<PAGE> 40
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model which resulted in a weighted
average fair value of $15.08, $10.87 and $18.68 for grants made during the years
ended December 31, 1999, 1998 and 1997, respectively. The following assumptions
were used for option grants in 1999, 1998 and 1997, respectively; dividend yield
of 1.7 percent, 1.7 percent and 1.5 percent; expected volatility of 34 percent,
39 percent and 19 percent; risk-free interest rates of 6.8 percent, 5.3 percent
and 5.7 percent and an expected life of six years. The compensation expense
included in the above pro forma net income may not be indicative of amounts to
be included in future periods as the fair value of options granted prior to
adopting SFAS No. 123 was not determined.
A summary of the Company's stock option plans as of December 31, 1999,
1998 and 1997, and changes during those years is presented below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise
Under Option Price
------------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996................... 1,263,018 $18.46
Options granted.................................... 284,500 69.06
Options forfeited.................................. (19,335) 18.03
Options exercised.................................. (159,021) 11.39
---------
Outstanding at December 31, 1997................... 1,369,162 29.79
Options granted.................................... 876,000 23.56
Options forfeited.................................. (9,220) 51.03
Options exercised.................................. (33,186) 14.05
---------
Outstanding at December 31, 1998................... 2,202,756 27.47
Options granted.................................... 546,110 39.19
Options forfeited.................................. (22,175) 32.65
Options exercised.................................. (237,401) 13.05
---------
Outstanding at December 31, 1999................... 2,489,290 $31.37
=========
</TABLE>
39
<PAGE> 41
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The number of outstanding fixed stock options exercisable at December
31, 1998 and 1997 was 942,994 and 670,507; respectively. These options had a
weighted average exercise price of $20.74 and $15.22 at December 31, 1998 and
1997, respectively. The following summarizes information about fixed stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
- ---------------- ----------- ---------------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 8.38 - $10.31 79,440 3.7 $9.38 79,440 $ 9.38
$12.56 - $17.88 504,018 5.0 14.43 504,018 14.43
$22.50 - $41.13 1,629,757 9.0 31.30 379,345 31.63
$69.06 276,075 7.9 69.06 138,038 69.06
------- --- ----- --------- -------
2,489,290 7.9 $31.37 1,100,841 $ 26.84
========= === ====== ========= =======
</TABLE>
At December 31, 1999, there were 1,108,144 shares of common stock
reserved under the 1989 Plan for the future granting of stock options, awarding
of additional restricted stock options and/or awarding of additional Stock
Appreciation Rights.
11. EMPLOYEE BENEFITS
Pension Plans
The Company has pension plans in the United States and the United
Kingdom ("U.K."). In 1987, Smith and Wilson amended their defined benefit plans
to freeze all future benefit accruals and prohibit the addition of any new
participants. At that time, the plans covered substantially all full-time U.S.
employees of the respective companies. Due to the freezing of the plans, no
material contributions were made to the plans for any period presented. Although
M-I sponsors certain defined benefit plans, most of the M-I employees are not
covered by a pension plan. During 1997, a decision was made to terminate the
U.K. pension plan and replace it with a defined contribution plan. Benefit
accruals were frozen in 1998 and all obligations to plan participants in the
U.K. pension plan are expected to be settled in 2000.
The Company has several other pension plans covering certain U.S. and
non-U.S. employees as well as a pension plan covering directors. Pension
expense, benefit obligations and the fair value of plan assets for these plans
were not material at or for the periods ended December 31, 1999, 1998 or 1997.
Postretirement Benefit Plans
The Company and its subsidiaries provide certain health care benefits
for retired employees. Many of the employees who retire from the Company are
eligible for these benefits.
The Smith International, Inc. Retiree Medical Plan ("Smith Medical
Plan") provides postretirement medical benefits to retirees and their spouses.
The retiree medical plan has an annual limitation (the "cap") on the dollar
amount of the Company's portion of the cost of benefits incurred by retirees
under the Smith Medical Plan. The remaining cost of benefits in excess of the
cap is the responsibility of the participants. The cap will be adjusted annually
for inflation, which is currently assumed to be 4 percent.
M-I provides medical coverage to eligible retirees and their dependents
under the M-I Drilling Fluids Retiree Medical Plan ("M-I Medical Plan").
Eligibility for inclusion in that plan, however, was closed as of January 1,
1994, to the majority of M-I's employees. M-I contributes to the cost of
benefits under this plan; however, these costs are reviewed annually for
inflation, and limited to a maximum 5 percent increase in M-I's contribution per
year. Any costs in excess of M-I's maximum contribution are the responsibility
of the retiree or their dependents.
Although Wilson provides postretirement medical coverage to eligible
retirees and their spouses, new employees have not been eligible for inclusion
under this program since February 1987. Eligible individuals are able to
continue primary medical
40
<PAGE> 42
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
coverage under Wilson's group insurance programs until reaching the age of 65 at
which time such coverage becomes secondary for participants electing to remain
in the program. Participating retirees are required to contribute a portion of
the insurance premiums under the program with Wilson responsible for any costs
in excess of those contributions.
The following tables disclose the changes in benefit obligations and
plan assets during the periods presented and reconcile the funded status of the
plans to the amounts included in the accompanying Consolidated Balance Sheets.
<TABLE>
<CAPTION>
PENSION PLANS POSTRETIREMENT BENEFIT PLANS
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Changes in benefit obligations:
Benefit obligations at beginning of year ............ $ 26,402 $ 23,787 $ 18,519 $ 19,575
Service cost ........................................ -- 226 274 261
Interest cost ....................................... 1,604 1,628 1,057 1,224
Plan participants contributions ..................... -- -- 380 341
Actuarial loss (gain) ............................... (2,045) 2,262 (2,603) (1,471)
Plan amendments ..................................... -- -- (1,826) --
Benefits paid ....................................... (980) (1,501) (1,206) (1,411)
---------- ---------- ---------- ----------
Benefit obligations at end of year .................. $ 24,981 $ 26,402 $ 14,595 $ 18,519
========== ========== ========== ==========
Changes in plan assets:
Fair value of plan assets at beginning of year ...... $ 26,797 $ 23,700 $ -- $ --
Actual return on plan assets ........................ 478 4,220 -- --
Employer contributions .............................. -- 378 826 1,070
Plan participants contribution ...................... -- -- 380 341
Benefits paid ....................................... (980) (1,501) (1,206) (1,411)
---------- ---------- ---------- ----------
Fair value of plan assets at end of year ............ $ 26,295 $ 26,797 $ -- $ --
========== ========== ========== ==========
Funded status ....................................... $ 1,314 $ 395 $ (14,595) $ (18,519)
Unrecognized net actuarial gain ..................... (775) (915) (3,407) (747)
Unrecognized prior service cost ..................... -- -- (1,716) (1,075)
---------- ---------- ---------- ----------
Prepaid benefit (accrued liability) ................. $ 539 $ (520) $ (19,718) $ (20,341)
========== ========== ========== ==========
</TABLE>
41
<PAGE> 43
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Assumptions used for financial reporting purposes to compute net
benefit expense and its components are as follows:
<TABLE>
<CAPTION>
PENSION PLANS POSTRETIREMENT BENEFIT PLANS
-------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average assumptions:
Discount rate.......................................... 6.35% - 7.40% 5.50% - 6.75% 7.40% - 7.70% 6.16% - 6.75%
Expected return on plan assets......................... 6.00% - 8.50% 5.50% - 8.50% N/A N/A
Components of net periodic benefit expense:
Service cost........................................... $ -- $ 226 $ 274 $ 261
Interest cost.......................................... 1,604 1,628 1,057 1,224
Return on plan assets.................................. (1,782) (1,850) -- --
Amortization of prior service cost..................... -- 1 (1,185) (940)
Amortization of loss (gain)............................ (44) 144 56 (4)
------------- ------------- ------------- -------------
Net periodic benefit expense (credit).................. $ (222) $ 149 $ 202 $ 541
============= ============= ============= =============
</TABLE>
The health care cost trend rate assumption can have a significant
effect on the amounts reported. An increase of one percentage point in the
health care cost trend rate would increase the accumulated postretirement
benefit obligation and the aggregate of the service and interest cost components
of the postretirement benefits expense by $1.9 million and $0.2 million,
respectively. A decrease of one percentage point in the health care cost trend
rate would decrease the accumulated postretirement benefit obligation and the
aggregate of the service and interest cost components of the postretirement
benefits expense by $1.6 million and $0.2 million, respectively.
12. RETIREMENT PLANS
The Company established the Smith International, Inc. 401(k) Retirement
Plan (the "Plan") for the benefit of all eligible employees. Employees may
voluntarily contribute up to 12 percent of compensation, as defined, to the
Plan. The Company makes retirement, matching and, in certain cases,
discretionary matching contributions to each participant's account under the
Plan. Participants receive a full match of the first 1 1/2 percent of their
contributions along with a retirement contribution ranging from two percent to
six percent of their qualified compensation. In addition, the Board of Directors
may provide discretionary matching contributions based upon financial
performance to participants who are employed by the Company on December 31. The
Company's contributions to the Plan totaled approximately $8.5 million, $5.1
million and $6.9 million in 1999, 1998 and 1997, respectively.
M-I has a Company Profit-Sharing and Savings Plan (the "M-I Plan")
under which participating employees may defer up to 12 percent of their
compensation, as defined. Under the terms of the M-I Plan, qualified employees
are eligible to receive basic, matching and profit-sharing contributions with
the approval of the Employee Benefits Committee, and in certain instances, the
Board of Directors. Participants are eligible to receive a basic contribution
equal to three percent of qualified compensation, and a full match of the first
1 1/2 percent of their contributions. In addition, the Board of Directors may
provide discretionary profit-sharing contributions based upon financial
performance to participants who are employed by M-I on December 31. Total
contributions under the M-I Plan approximated $3.9 million, $4.0 million and
$5.0 million in 1999, 1998 and 1997, respectively.
Certain of the Company's subsidiaries sponsor various defined
contribution plans. The Company's contributions under these plans for each of
the three years in the period ended December 31, 1999, were immaterial.
42
<PAGE> 44
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
13. INDUSTRY SEGMENTS AND INTERNATIONAL OPERATIONS
The Company manufactures and markets premium products and services to
the oil and gas exploration and production, the petrochemical industry and other
industrial markets. In 1999, the Company redefined its operations into two
reportable segments: Oilfield Products and Services Group and Distribution
Group. The Oilfield Products and Services Group consists of three business
units: M-I, which primarily provides drilling and completion fluid systems and
services, solids-control equipment and waste-management services; Smith Bits,
which manufactures and sells three-cone and diamond drill bits; and Smith
Services, which manufactures and markets products and services used for
drilling, workover, well completion and well re-entry operations. The
Distribution Group consists of one business unit: Wilson, which markets pipe,
valves, fittings, mill, safety and other maintenance products to energy and
industrial markets.
The principal markets for these segments include all major oil and gas
producing regions of the world including North America, Latin America,
Europe/Africa, the Middle East and the Far East. The Company's customers include
major multi-national, independent and national, or state-owned, oil companies.
The following table presents financial information for each reportable
segment:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Oilfield Products and Services Group ..... $ 1,309,539 $ 1,646,168 $ 1,624,658
Distribution Group ....................... 496,614 472,547 543,294
------------ ------------ ------------
$ 1,806,153 $ 2,118,715 $ 2,167,952
============ ============ ============
Income before interest and taxes:
Oilfield Products and Services Group ..... $ 70,630 $ 209,621 $ 237,433
Distribution Group ....................... 178 3,184 15,424
General corporate ........................ (5,275) (4,996) (3,911)
Non-recurring items ...................... 83,999 (82,500) --
------------ ------------ ------------
$ 149,532 $ 125,309 $ 248,946
============ ============ ============
Non-Recurring Items (See Note 3):
Oilfield Products and Services Group ..... $ 83,999 $ (52,500) $ --
Distribution Group ....................... -- (30,000) --
------------ ------------ ------------
$ 83,999 $ (82,500) $ --
============ ============ ============
Capital Expenditures:
Oilfield Products and Services Group ..... $ 52,013 $ 111,811 $ 106,564
Distribution Group ....................... 4,776 4,008 5,747
General corporate ........................ 385 3,385 835
------------ ------------ ------------
$ 57,174 $ 119,204 $ 113,146
============ ============ ============
Depreciation and Amortization:
Oilfield Products and Services Group ..... $ 68,541 $ 64,398 $ 52,845
Distribution Group ....................... 4,953 3,496 2,879
General corporate ........................ 2,543 2,422 2,829
------------ ------------ ------------
$ 76,037 $ 70,316 $ 58,553
============ ============ ============
Total Assets:
Oilfield Products and Services Group ..... $ 1,499,735 $ 1,523,023 $ 1,386,241
Distribution Group ....................... 281,970 142,252 199,081
General corporate ........................ 112,870 93,713 87,177
------------ ------------ ------------
$ 1,894,575 $ 1,758,988 $ 1,672,499
============ ============ ============
</TABLE>
43
<PAGE> 45
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The following table presents consolidated revenues by country:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
United States ........................................................ $ 834,783 $ 1,017,016 $ 1,147,244
United Kingdom ....................................................... 84,115 119,865 115,398
Canada ............................................................... 204,956 101,264 98,530
Norway ............................................................... 86,784 88,316 102,753
Venezuela ............................................................ 60,383 89,113 121,630
Other ................................................................ 535,132 703,141 582,397
------------ ------------ ------------
$ 1,806,153 $ 2,118,715 $ 2,167,952
============ ============ ============
</TABLE>
The following table presents the net long-lived assets by country:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
United States ........................................................ $ 210,783 $ 219,819 $ 181,230
United Kingdom ....................................................... 14,434 13,410 11,151
Canada ............................................................... 36,679 18,569 20,082
Norway ............................................................... 11,292 12,152 9,696
Venezuela ............................................................ 16,665 20,600 20,075
Other ................................................................ 91,229 90,686 70,429
------------ ------------ ------------
$ 381,082 $ 375,236 $ 312,663
============ ============ ============
</TABLE>
The Company's revenues are derived principally from uncollateralized
sales to customers in the oil and gas industry. This industry concentration has
the potential to impact the Company's exposure to credit risk, either positively
or negatively, because customers may be similarly affected by changes in
economic or other conditions. The creditworthiness of this customer base is
strong, and the Company has not experienced significant credit losses on such
receivables.
14. COMMITMENTS AND CONTINGENCIES
Leases
The Company routinely enters into operating and capital leases for
certain of its facilities and equipment. Amounts related to assets under capital
lease were immaterial for the periods presented. Rent expense totaled $30.6
million, $24.9 million and $20.2 million in 1999, 1998 and 1997, respectively.
Future minimum payments under all non-cancelable operating leases having initial
terms of one year or more are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- ------------ ---------
<S> <C>
2000................................................... $ 24,484
2001................................................... 18,222
2002................................................... 12,870
2003................................................... 9,916
2004................................................... 7,290
Thereafter............................................. 42,691
---------
$ 115,473
=========
</TABLE>
44
<PAGE> 46
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Litigation
On October 29, 1996, the Company was served with a complaint in the
United States District Court in Houston, Texas entitled Rock Bit International,
Inc. v. Smith International, Inc. which alleged that drill bits made by the
Company infringed a U.S. patent owned by Rock Bit International ("RBI"). On
September 30, 1999, the United States District Court granted the Company's
motion for summary judgement and entered a Final Judgement holding the asserted
claims of the RBI patent invalid. On November 30, 1999, the Court awarded the
Company all of its attorneys' fees and costs. RBI appealed the Final Judgement
and the award of fees and costs. Subsequent to year-end, Smith and RBI reached
final settlement whereby RBI abandoned its appeals, paid certain cash
consideration and gave the Company a release and license under all current
inventions, patent applications and patents.
On July 27, 1999, the United States Department of Justice filed
petitions with the United States District Court in Washington, D.C., which
alleged civil and criminal contempt in connection with the formation of the
Company's drilling fluids joint venture. The petitions alleged that the Company
and Schlumberger violated a Consent Decree and Final Order issued in 1994 in
United States v. Baroid Corporation. The Company agreed to be bound by the
Consent Decree in connection with the purchase of the majority ownership
interest in M-I in April 1994. On December 9, 1999, the Company and Schlumberger
entered into a settlement agreement with the Department of Justice as to the
civil contempt petition and agreed to pay a civil fine in the total amount of
$13.1 million. The Department of Justice agreed that it would support the
Company's request to modify the Consent Decree to permit the transaction. The
criminal contempt claim was submitted to the Court. On December 9, 1999, the
Court found the companies in criminal contempt and fined each company $750,000,
which the companies elected not to appeal. On December 22, 1999, the Company
filed a motion to modify the Consent Decree. Subsequent to year-end, the Company
was granted a modification of the Consent Decree and Final Order paid its
portion of the civil and criminal fines which aggregated $7.5 million.
The Company is a defendant in various other legal proceedings arising
in the ordinary course of business. In the opinion of management, these matters
will not have a material adverse effect on the Company's consolidated financial
position or results of operations.
Environmental
Although the Company believes it is in substantial compliance with
environmental protection laws, estimating the costs of compliance with these
regulations is difficult considering the continual changes in environmental
legislation.
The Company is involved in several actions relating to alleged
liability in connection with the U.S. Environmental Protection Agency's ("EPA")
National Priorities List ("NPL") sites. The Company has been named as a
potentially responsible party ("PRP") in the three NPL sites discussed below.
Federal law generally imposes joint and several liability for site clean-up
costs investigated under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (the "Superfund Act") without regard to fault or site
ownership considerations.
Sheridan. The Company has been named a PRP in connection with the
Sheridan Disposal Services Superfund site in Hempstead, Texas. On August 28,
1997, the Company reached a settlement and agreed to pay its allocable share of
response costs incurred, with such share limited to the lesser of $3.0 million
or 2.93 percent of actual response costs. Based upon an EPA Record of Decision,
total remediation costs are estimated at approximately $28 million. On this
basis, the Company's share would equal $0.8 million after taking into
consideration amounts previously contributed.
Operating Industries. The Company is currently negotiating a settlement
related to the Operating Industries, Inc. ("OII") Superfund site located in
Monterey Park, California. During 1998, the Company received a de minimus
settlement offer from the EPA to discharge existing and future obligations
related to OII site response costs. The Company expects to make future
contributions of approximately $0.2 million to cover its allocable share of site
remediation costs.
45
<PAGE> 47
SMITH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Chemform. The Company has also been named a PRP in connection with the
contamination of property located in Pompano Beach, Florida. In 1996, the EPA
sought to collect approximately $0.8 million in response and oversite costs from
the PRPs, of which the Company's share would have approximated $0.4 million. The
Company and the other PRPs are contesting this claim and are requesting
additional information.
At December 31, 1999, the remaining recorded liability for estimated
future clean-up costs for the sites discussed above as well as properties
currently or previously owned or leased by the Company was $3.9 million. The
Company believes that none of its clean-up obligations will result in
liabilities having a material adverse effect on the Company's consolidated
financial position or results of operations.
15. SUBSEQUENT EVENT
Subsequent to December 31, 1999, the Company acquired Texas Mill Supply
and Manufacturing, Inc., a provider of industrial mill and safety products and
management services to the refining, power generation, petrochemical and
chemical markets, with borrowings under existing credit facilities.
16. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
----- ------ ----- ------ ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1999
Revenues.................................. $ 397,022 $ 389,695 $ 481,541 $ 537,895 $ 1,806,153
Gross profit.............................. 111,339 98,685 118,836 139,080 467,940
Net income (loss)......................... 6,606 (3,021) 46,860 6,279 56,724
Basic earnings (loss) per share........... 0.14 (0.06) 0.96 0.13 1.17
Diluted earnings (loss) per share......... 0.14 (0.06) 0.95 0.13 1.15
1998
Revenues.................................. $ 578,933 $ 557,749 $ 520,209 $ 461,824 $ 2,118,715
Gross profit.............................. 181,846 172,876 154,565 119,772 629,059
Net income (loss)......................... 33,577 (7,492) 24,053 (16,069) 34,069
Basic earnings (loss) per share........... 0.71 (0.16) 0.50 (0.33) 0.71
Diluted earnings (loss) per share......... 0.70 (0.16) 0.50 (0.33) 0.70
</TABLE>
46
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning directors of the Registrant, see the
information set forth following the caption "ELECTION OF DIRECTORS" in the
Company's definitive proxy statement to be filed no later than 120 days after
the end of the fiscal year covered by this Form 10-K (the "Proxy Statement"),
which information is incorporated herein by reference. For information
concerning executive officers of the Registrant, see Item 4A appearing in Part I
of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth following the caption "EXECUTIVE
COMPENSATION" in the Company's Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth following the captions "ELECTION OF
DIRECTORS" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS" in the
Company's Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth following the captions "ELECTION OF
DIRECTORS" and "EXECUTIVE COMPENSATION" in the Company's Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C> <C>
(1) Financial statements included in this report:
Report of Independent Public Accountants.................................................... 20
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................................................... 21
Consolidated Balance Sheets at December 31, 1999 and 1998................................... 22
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 1999, 1998 and 1997...................................... 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................................................... 25
Notes to Consolidated Financial Statements.................................................. 26
(2) Financial Statement Schedule for the years ended December 31,
1999, 1998 and 1997:
Report of Independent Public Accountants on Financial Statement Schedule.................... 52
Schedule II-Valuation and Qualifying Accounts and Reserves.................................. 53
</TABLE>
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements or notes thereto.
47
<PAGE> 49
(3) EXHIBITS AND INDEX TO EXHIBITS
<TABLE>
<S> <C> <C>
3.l - Restated Certificate of Incorporation of the Company as
amended to date. Filed as Exhibit 3.1 to the Company's
report on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
3.2 - Bylaws of the Company as amended to date. Filed as Exhibit
3.1 to the Company's report on Form 8-K dated August 13,
1998 (and filed on August 14, 1998) and incorporated herein
by reference.
4.1 - Rights Agreement, dated as of June 19, 1990, between the
Company and First Chicago Trust Company of New York. Filed
as Exhibit 4.1 to the Company's report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by
reference.
4.2 - Form of Indenture between the Company and The Bank of New
York, as Trustee. Filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-3 dated August 22, 1997 and
incorporated herein by reference.
4.3 - Form of Note. Filed as Exhibit 4.2 to Amendment No. 1 to the
Company's Registration Statement on Form S-3 dated September 9,
1997 and incorporated herein by reference.
9. - Not applicable.
10.1 - Smith International, Inc. Supplemental Pension Plan as
amended to date. Filed as Exhibit 10.1 to the Company's
report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.
10.2 - Smith International, Inc. 1989 Long Term Incentive
Compensation Plan, as amended to date.
10.3 - Smith International, Inc. Directors' Retirement Plan as
amended to date. Filed as Exhibit 10.4 to the Company's
report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.
10.4 - Smith International, Inc. Supplemental Executive Retirement
Plan, as amended. Filed as Exhibit 10.5 to the Company's
report on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
10.5 - Supply Agreement dated April 2, 1987 between the Company and
TCM Holding Corporation and Rogers Tool Works, Inc. for the
supply of tungsten carbide products. Filed as Exhibit 10.6
to the Company's report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference.
10.6 - Amendment to Supply Agreement dated January 22, 1993 between
the Company and Rogers Tool Works, Inc. Filed as Exhibit
10.7 to the Company's report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference.
10.7 - Supply Agreement dated October 1, 1989 between the Company
and Amforge-Smith Forge Company for the supply of forgings.
Filed as Exhibit 10.8 to the Company's report on Form 10-K
for the year ended December 31, 1995 and incorporated herein
by reference.
</TABLE>
48
<PAGE> 50
<TABLE>
<S> <C> <C>
10.8 - Employment Agreement dated December 10, 1987 between the
Company and Douglas L. Rock. Filed as Exhibit 10.11 to the
Company's report on Form 10-K for the year ended December 31,
1993 and incorporated herein by reference.
10.9 - Employment Agreement dated January 2, 1991 between the
Company and Neal S. Sutton. Filed as Exhibit 10.11 to the
Company's report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference.
10.10 - Employment Agreement dated May 1, 1991 between the Company
and Richard A. Werner. Filed as Exhibit 10.12 to the
Company's report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference
10.11 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Douglas L. Rock.
10.12 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Neal S. Sutton.
10.13 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Richard A. Werner.
10.14 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Loren K. Carroll.
10.15 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Margaret K. Dorman.
10.16 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and John J. Kennedy.
10.17 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Roger A. Brown.
10.18 - Note Agreement, dated as of May 21, 1996, between the
Company and Principal Mutual Life Insurance Company, John
Hancock Mutual Life Insurance Company, John Hancock Variable
Life Insurance Company, IDS Certificate Company, Mellon
Bank, N.A., as Trustee for AT&T Master Pension Trust and The
Maritime Life Assurance Company. Filed as Exhibit 10.3 to
the Company's report on Form 10-Q for the quarter ended
June 30, 1996 and incorporated herein by reference.
10.19 - First Amendment and Waiver to Note Agreement, dated as of
May 5, 1997, between the Company and Principal Mutual Life
Insurance Company, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company, IDS
Certificate Company, Mellon Bank, N.A., as Trustee for AT&T
Master Pension Trust and The Maritime Life Assurance
Company. Filed as Exhibit 10.19 to the Company's report on
Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
10.20 - Second Amendment to Note Agreement, dated as of
July 31, 1998, between the Company and Principal Mutual Life
Insurance Company, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company, IDS
Certificate Company, Mellon Bank, N.A., as Trustee for AT&T
Master Pension Trust and The Maritime Life Assurance
Company. Filed as Exhibit 10.20 to the Company's report on
Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
</TABLE>
49
<PAGE> 51
<TABLE>
<S> <C> <C>
10.21 - Third Amendment to Note Agreement, dated as of
April 27, 1999, between the Company and Principal Life
Insurance Company, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company, IDS
Certificate Company, Mellon Bank, N.A., as Trustee for AT&T
Master Pension Trust and The Maritime Life Assurance
Company.
10.22 - Fourth Amendment to Note Agreement, dated as of
September 30, 1999, between the Company and Principal Life
Insurance Company, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company, IDS
Certificate Company, Mellon Bank, N.A., as Trustee for AT&T
Master Pension Trust and The Maritime Life Assurance
Company.
10.23 - Loan Agreement dated as of April 4, 1996, by and among the
Company and Texas Commerce Bank National Association, a
national banking association, individually and as Agent, and
the other financial institutions parties thereto. Filed as
Exhibit 10.1 to the Company's report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated herein by
reference.
10.24 - Loan Agreement dated as of April 4, 1996, by and among M-I
Drilling Fluids Company, L.L.C., Texas Commerce Bank
National Association, individually and as Agent, and the
other financial institutions parties thereto. Filed as
Exhibit 10.2 to the Company's report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated herein by
reference.
10.25 - First Amendment to Loan Agreement dated April 8, 1997, by
and among the Company and Texas Commerce Bank National
Association, a national banking association, individually
and as Agent, and the other financial institutions parties
thereto. Filed as Exhibit 10.1 to the Company's report on
Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference.
10.26 - First Amendment to Loan Agreement dated April 8, 1997, by
and among M-I Drilling Fluids, L.L.C., Texas Commerce Bank
National Association, a national banking association,
individually and as Agent, and the other financial
institutions parties thereto. Filed as Exhibit 10.2 to the
Company's report on Form 10-Q for the quarter ended June 30,
1997 and incorporated herein by reference.
10.27 - Second Amendment to Loan Agreement dated December 23, 1997,
by and among the Company and Texas Commerce Bank National
Association, a national banking association, individually
and as Agent, and the other financial institutions parties
thereto. Filed as Exhibit 10.27 to the Company's report on
Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.
10.28 - Second Amendment to Loan Agreement dated December 23, 1997,
by and among M-I Drilling Fluids, L.L.C., Texas Commerce
Bank National Association, a national banking association,
individually and as Agent, and the other financial
institutions parties thereto. Filed as Exhibit 10.28 to the
Company's report on Form 10-K for the year ended December
31, 1997 and incorporated herein by reference.
10.29 - Amendment to Loan Agreement and Interest Rate Agreement
dated August 31, 1998, by and among M-I L.L.C. and Chase
Bank of Texas, National Association (formerly known as Texas
Commerce Bank National Association), a national banking
association, individually and as Agent, and the other
financial parties thereto. Filed as Exhibit 10.1 to the
Company's report on Form 10-Q for the quarter ended March
31, 1999 and incorporated herein by reference.
</TABLE>
50
<PAGE> 52
<TABLE>
<S> <C> <C>
10.30 - Amendment to Loan Agreement dated August 31, 1998, by and
among the Company and Chase Bank of Texas, National
Association (formerly known as Texas Commerce Bank National
Association), a national banking association, individually
and as Agent, and the other financial institutions parties
thereto. Filed as Exhibit 10.2 to the Company's report on
Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
10.31 - Amendment to Loan Agreement dated December 31, 1998, by and
among the Company and Chase Bank of Texas, National
Association (formerly known as Texas Commerce Bank National
Association), a national banking association, individually
and as Agent, and the other financial institutions parties
hereto. Filed as Exhibit 10.3 to the Company's report on
Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
11. - Not applicable.
12. - Not applicable.
13. - Not applicable.
18. - Not applicable.
19. - Not applicable.
21.1. - Subsidiaries of the Company
23.1 - Consent of Independent Public Accountants.
27.1 - Financial Data Schedule for the twelve months ended
December 31, 1999.
</TABLE>
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
51
<PAGE> 53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To Smith International, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Smith International, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and comprehensive income, and
cash flows for each of the three years in the period ended December 31, 1999,
included in this Form 10-K, and have issued our report thereon dated January 28,
2000. Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The financial statement
schedule listed in Part IV, Item 14(A)(2) for Smith International, Inc. and
subsidiaries is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This financial statement
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
January 28, 2000
52
<PAGE> 54
SCHEDULE II
SMITH INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
----------------------- -----------
BALANCE AT CHARGED BALANCE
BEGINNING TO AT END
OF YEAR EXPENSE OTHER(a) WRITE-OFFS OF YEAR
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year Ended--December 31, 1999 ... $ 10,437 $ 2,029 $ -- $ (2,830) $ 9,636
Year Ended--December 31, 1998 ... 8,730 3,016 58 (1,367) 10,437
Year Ended--December 31, 1997 ... 9,114 2,976 25 (3,385) 8,730
</TABLE>
(a) Amounts represent accounts receivable reserves related to acquisitions
made by the Company during the years presented.
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
----------------------- -----------
BALANCE AT CHARGED BALANCE
BEGINNING TO AT END
OF YEAR EXPENSE OTHER(a) WRITE-OFFS OF YEAR
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Accrued merger and restructuring costs:
Year Ended-December 31, 1999 .... $ 36,299 $ -- $ -- $ (36,299) $ --
Year Ended-December 31, 1998 .... -- 82,500 -- (46,201) 36,299
Year Ended-December 31, 1997 .... -- -- -- -- --
</TABLE>
53
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SMITH INTERNATIONAL, INC.
By: /s/ DOUGLAS L. ROCK
-----------------------
Douglas L. Rock
Chief Executive Officer,
President and Chief Operating Officer
March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the date indicated:
<TABLE>
<S> <C> <C>
/s/ DOUGLAS L. ROCK Chairman of the Board, Chief
- --------------------------- Executive Officer, President and
(Douglas L. Rock) Chief Operating Officer March 24, 2000
/s/ LOREN K. CARROLL Executive Vice President March 24, 2000
- ---------------------------
(Loren K. Carroll)
/s/ MARGARET K. DORMAN Senior Vice President, Chief Financial
- --------------------------- Officer and Treasurer March 24, 2000
(Margaret K. Dorman)
/s/ BENJAMIN F. BAILAR Director March 24, 2000
- ---------------------------
(Benjamin F. Bailar)
/s/ G. CLYDE BUCK Director March 24, 2000
- ---------------------------
(G. Clyde Buck)
/s/ JAMES R. GIBBS Director March 24, 2000
- ---------------------------
(James R. Gibbs)
/s/ JERRY W. NEELY Director March 24, 2000
- ---------------------------
(Jerry W. Neely)
/s/ WALLACE S. WILSON Director March 24, 2000
- ---------------------------
(Wallace S. Wilson)
</TABLE>
54
<PAGE> 56
EXHIBIT INDEX
<TABLE>
Exhibit
Number Description
- ------- -----------
<S> <C> <C>
3.l - Restated Certificate of Incorporation of the Company as
amended to date. Filed as Exhibit 3.1 to the Company's
report on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
3.2 - Bylaws of the Company as amended to date. Filed as Exhibit
3.1 to the Company's report on Form 8-K dated August 13,
1998 (and filed on August 14, 1998) and incorporated herein
by reference.
4.1 - Rights Agreement, dated as of June 19, 1990, between the
Company and First Chicago Trust Company of New York. Filed
as Exhibit 4.1 to the Company's report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by
reference.
4.2 - Form of Indenture between the Company and The Bank of New
York, as Trustee. Filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-3 dated August 22, 1997 and
incorporated herein by reference.
4.3 - Form of Note. Filed as Exhibit 4.2 to Amendment No. 1 to the
Company's Registration Statement on Form S-3 dated September 9,
1997 and incorporated herein by reference.
9. - Not applicable.
10.1 - Smith International, Inc. Supplemental Pension Plan as
amended to date. Filed as Exhibit 10.1 to the Company's
report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.
10.2 - Smith International, Inc. 1989 Long Term Incentive
Compensation Plan, as amended to date.
10.3 - Smith International, Inc. Directors' Retirement Plan as
amended to date. Filed as Exhibit 10.4 to the Company's
report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.
10.4 - Smith International, Inc. Supplemental Executive Retirement
Plan, as amended. Filed as Exhibit 10.5 to the Company's
report on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
10.5 - Supply Agreement dated April 2, 1987 between the Company and
TCM Holding Corporation and Rogers Tool Works, Inc. for the
supply of tungsten carbide products. Filed as Exhibit 10.6
to the Company's report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference.
10.6 - Amendment to Supply Agreement dated January 22, 1993 between
the Company and Rogers Tool Works, Inc. Filed as Exhibit
10.7 to the Company's report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference.
10.7 - Supply Agreement dated October 1, 1989 between the Company
and Amforge-Smith Forge Company for the supply of forgings.
Filed as Exhibit 10.8 to the Company's report on Form 10-K
for the year ended December 31, 1995 and incorporated herein
by reference.
</TABLE>
<PAGE> 57
<TABLE>
<S> <C> <C>
10.8 - Employment Agreement dated December 10, 1987 between the
Company and Douglas L. Rock. Filed as Exhibit 10.11 to the
Company's report on Form 10-K for the year ended December 31,
1993 and incorporated herein by reference.
10.9 - Employment Agreement dated January 2, 1991 between the
Company and Neal S. Sutton. Filed as Exhibit 10.11 to the
Company's report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference.
10.10 - Employment Agreement dated May 1, 1991 between the Company
and Richard A. Werner. Filed as Exhibit 10.12 to the
Company's report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference.
10.11 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Douglas L. Rock.
10.12 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Neal S. Sutton.
10.13 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Richard A. Werner.
10.14 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Loren K. Carroll.
10.15 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Margaret K. Dorman.
10.16 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and John J. Kennedy.
10.17 - Change-of-Control Employment Agreement dated January 4, 2000
between the Company and Roger A. Brown.
10.18 - Note Agreement, dated as of May 21, 1996, between the
Company and Principal Mutual Life Insurance Company, John
Hancock Mutual Life Insurance Company, John Hancock Variable
Life Insurance Company, IDS Certificate Company, Mellon
Bank, N.A., as Trustee for AT&T Master Pension Trust and The
Maritime Life Assurance Company. Filed as Exhibit 10.3 to
the Company's report on Form 10-Q for the quarter ended
June 30, 1996 and incorporated herein by reference.
10.19 - First Amendment and Waiver to Note Agreement, dated as of
May 5, 1997, between the Company and Principal Mutual Life
Insurance Company, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company, IDS
Certificate Company, Mellon Bank, N.A., as Trustee for AT&T
Master Pension Trust and The Maritime Life Assurance
Company. Filed as Exhibit 10.19 to the Company's report on
Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
10.20 - Second Amendment to Note Agreement, dated as of
July 31, 1998, between the Company and Principal Mutual Life
Insurance Company, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company, IDS
Certificate Company, Mellon Bank, N.A., as Trustee for AT&T
Master Pension Trust and The Maritime Life Assurance
Company. Filed as Exhibit 10.20 to the Company's report on
Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference.
</TABLE>
<PAGE> 58
<TABLE>
<S> <C> <C>
10.21 - Third Amendment to Note Agreement, dated as of
April 27, 1999, between the Company and Principal Life
Insurance Company, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company, IDS
Certificate Company, Mellon Bank, N.A., as Trustee for AT&T
Master Pension Trust and The Maritime Life Assurance
Company.
10.22 - Fourth Amendment to Note Agreement, dated as of
September 30, 1999, between the Company and Principal Life
Insurance Company, John Hancock Mutual Life Insurance
Company, John Hancock Variable Life Insurance Company, IDS
Certificate Company, Mellon Bank, N.A., as Trustee for AT&T
Master Pension Trust and The Maritime Life Assurance
Company.
10.23 - Loan Agreement dated as of April 4, 1996, by and among the
Company and Texas Commerce Bank National Association, a
national banking association, individually and as Agent, and
the other financial institutions parties thereto. Filed as
Exhibit 10.1 to the Company's report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated herein by
reference.
10.24 - Loan Agreement dated as of April 4, 1996, by and among M-I
Drilling Fluids Company, L.L.C., Texas Commerce Bank
National Association, individually and as Agent, and the
other financial institutions parties thereto. Filed as
Exhibit 10.2 to the Company's report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated herein by
reference.
10.25 - First Amendment to Loan Agreement dated April 8, 1997, by
and among the Company and Texas Commerce Bank National
Association, a national banking association, individually
and as Agent, and the other financial institutions parties
thereto. Filed as Exhibit 10.1 to the Company's report on
Form 10-Q for the quarter ended June 30, 1997 and
incorporated herein by reference.
10.26 - First Amendment to Loan Agreement dated April 8, 1997, by
and among M-I Drilling Fluids, L.L.C., Texas Commerce Bank
National Association, a national banking association,
individually and as Agent, and the other financial
institutions parties thereto. Filed as Exhibit 10.2 to the
Company's report on Form 10-Q for the quarter ended June 30,
1997 and incorporated herein by reference.
10.27 - Second Amendment to Loan Agreement dated December 23, 1997,
by and among the Company and Texas Commerce Bank National
Association, a national banking association, individually
and as Agent, and the other financial institutions parties
thereto. Filed as Exhibit 10.27 to the Company's report on
Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference.
10.28 - Second Amendment to Loan Agreement dated December 23, 1997,
by and among M-I Drilling Fluids, L.L.C., Texas Commerce
Bank National Association, a national banking association,
individually and as Agent, and the other financial
institutions parties thereto. Filed as Exhibit 10.28 to the
Company's report on Form 10-K for the year ended December
31, 1997 and incorporated herein by reference.
10.29 - Amendment to Loan Agreement and Interest Rate Agreement
dated August 31, 1998, by and among M-I L.L.C. and Chase
Bank of Texas, National Association (formerly known as Texas
Commerce Bank National Association), a national banking
association, individually and as Agent, and the other
financial parties thereto. Filed as Exhibit 10.1 to the
Company's report on Form 10-Q for the quarter ended March
31, 1999 and incorporated herein by reference.
</TABLE>
<PAGE> 59
<TABLE>
<S> <C> <C>
10.30 - Amendment to Loan Agreement dated August 31, 1998, by and
among the Company and Chase Bank of Texas, National
Association (formerly known as Texas Commerce Bank National
Association), a national banking association, individually
and as Agent, and the other financial institutions parties
thereto. Filed as Exhibit 10.2 to the Company's report on
Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
10.31 - Amendment to Loan Agreement dated December 31, 1998, by and
among the Company and Chase Bank of Texas, National
Association (formerly known as Texas Commerce Bank National
Association), a national banking association, individually
and as Agent, and the other financial institutions parties
hereto. Filed as Exhibit 10.3 to the Company's report on
Form 10-Q for the quarter ended March 31, 1999 and
incorporated herein by reference.
11. - Not applicable.
12. - Not applicable.
13. - Not applicable.
18. - Not applicable.
19. - Not applicable.
21.1. - Subsidiaries of the Company
23.1 - Consent of Independent Public Accountants.
27.1 - Financial Data Schedule for the twelve months ended
December 31, 1999.
</TABLE>
<PAGE> 1
EXHIBIT 10.2
SMITH INTERNATIONAL, INC.
1989 LONG-TERM INCENTIVE COMPENSATION PLAN
(As Amended and Restated as of February 2, 2000)
1. PURPOSE OF THE PLAN
The purpose of the 1989 Long-Term Incentive Compensation Plan (the
"Plan") is to advance the interests of Smith International, Inc. (the "Company")
and its shareholders by strengthening the ability of the Company to attract and
retain in its employ persons of training, experience and ability, and to furnish
additional incentives to officers and valued employees of the Company upon whose
judgment, initiative and efforts the successful conduct and development of the
business of the Company largely depends.
2. DEFINITIONS
Whenever the following terms are used in this Plan, they shall have the
meaning specified below unless the context clearly indicates to the contrary.
"Board of Directors" shall mean the Board of Directors of the Company.
"Cash Award" shall mean a cash award granted pursuant to Section 1 of
the Plan.
"Committee" shall mean the Compensation and Benefits Committee of the
Board of Directors, unless the Board of Directors appoints another committee to
administer the Plan.
"Common Stock" shall mean the common shares, $1.00 par value of the
Company and any class of common shares into which such common shares may
hereafter be converted.
"Company" shall mean Smith International, Inc.
"Director" shall mean a member of the Board of Directors.
"Disinterested Person" shall have the meaning assigned to that term
under the rules and regulations of the Securities and Exchange Commission under
the Securities Exchange Act of 1934.
"Eligible Person" shall mean a person eligible to receive an Incentive
Award.
"Employee" shall mean any employee of the Company, or of any of its
present or future parent or subsidiary corporations, or a corporation (or a
parent or subsidiary corporation of such corporation) issuing or assuming an
Option in a transaction to which Section 425(a) of the Internal
1
<PAGE> 2
Revenue Code applies, whether such Employee is so employed at the time this Plan
is adopted or becomes so employed subsequent to adoption of this Plan.
"Fair Market Value" shall mean the average of the high and low prices of a
share of Common Stock on the New York Stock Exchange on the date as of which
fair market value is to be determined, or if no such sales were made on such
date, the closing price of such shares on the New York Stock Exchange on the
next preceding date on which there were such sales; provided, however, that the
Committee may utilize such other listing or reporting services that in its
judgment provide an accurate index of the fair market value of the Common Stock.
"Holder" shall mean a person holding an Incentive Award.
"Incentive Award" shall mean an Option, Stock Appreciation Right,
Restricted Stock, Stock Award or Cash Award granted under the Plan.
"Nonstatutory Stock Option" shall mean an option granted pursuant to
Section 7 of the Plan.
"Option" shall mean a Nonstatutory Stock Option.
"Optionee" shall mean any person holding an Option granted under the
Plan.
"Parent corporation" and "subsidiary corporation" shall have the
meanings assigned to them in Sections 425(e) and 425(f) of the Internal Revenue
Code.
"Plan" shall mean the Smith International, Inc. 1989 Long-Term
Incentive Compensation Plan as set forth herein, as the same may be amended from
time to time.
"Stock Appreciation Right" shall mean a right granted pursuant to
Section 8 or Section 9 of the Plan to receive a number of shares of Common Stock
or, in the discretion of the Committee, an amount of cash or a combination of
shares and cash, based on the increase in the Fair Market Value of the shares
subject to the right.
"Stock Award" shall mean a stock award granted pursuant to Section 10
of the Plan.
3. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
(a) Subject to the provisions of Section 3(c) and Section 12 of the
Plan, the aggregate number of shares of Common Stock that may be issued or
transferred or as to which Stock Appreciation rights may be exercised pursuant
to Incentive Awards under the Plan shall not exceed 4,900,000.
(b) The shares to be delivered under the Plan shall be made available,
at the discretion of the Board of Directors or the Committee, either from
authorized but unissued shares of Common
2
<PAGE> 3
Stock or from previously issued shares of Common Stock reacquired by the
Company, including shares purchased on the open market. Common Stock issued
under the Plan in connection with restricted stock or stock awards shall be
issued shares held as treasury shares.
(c) If any shares of Common Stock subject to an Option are not issued
or transferred and cease to be issuable or transferable for any reason, the
shares not so issued or transferred shall no longer be charged against the
limitation provided for in Section 3(a) and may again be made subject to
Incentive Awards. However, shares as to which an Option has been surrendered in
connection with the exercise of a related Stock Appreciation Right shall not
again be available for the grant of any further Incentive Awards. If a Stock
Appreciation Right not related to an Option expires or terminates without having
been exercised, then the number of shares of Common Stock with respect to which
the unexercised portion of such Stock Appreciation Right was granted shall no
longer be charged against the limitation provided for in Section 3(a) and may
again be made subject to Incentive Awards.
(d) The Committee may, in its discretion, determine to cancel, and
agree to the cancellation of, Options in order to make a participant eligible
for the grant of an Option at a lower price than the option cancelled.
(e) In the event that shares of Common Stock are issued as restricted
stock or pursuant to a stock award and thereafter are forfeited or reacquired by
the Company pursuant to rights reserved upon issuance thereof, such forfeited
and reacquired shares may again be issued under the Plan, either as restricted
stock, pursuant to stock awards or otherwise.
4. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Committee, which shall
consist of three or more persons (i) who are not eligible to receive Incentive
Awards under the Plan, (ii) who have not been eligible, at any time within one
year prior to appointment to the Committee, for selection as persons to whom
Incentive Awards may be granted pursuant to the Plan or to whom shares may be
allocated or stock options or stock appreciation rights may be granted pursuant
to any other plan of the Company or any of its affiliates entitling the
participants therein to acquire stock, stock appreciation rights or options of
the Company or any of its affiliates and (iii) who are Disinterested Persons.
All members of the Committee shall be Disinterested Persons. The Board of
Directors may from time to time remove members from, or add members to, the
Committee. Vacancies on the Committee, however caused, shall be filled only by
the Board of Directors. The Board of Directors may take any action permitted to
be taken by the Committee if a majority of the Directors are Disinterested
Persons.
(b) The Committee shall have and may exercise such powers and authority
of the Board of Directors as may be necessary or appropriate for the Committee
to carry out its functions as described in the Plan, and any references in the
Plan to any specific power or authority of the Committee shall not derogate from
the foregoing. The Committee shall have authority in its discretion to determine
the Eligible Persons to whom, and the time or times at which, Incentive
3
<PAGE> 4
Awards may be granted and the number of shares subject to each Incentive Award.
Subject to the express provisions of the Plan, the Committee shall also have
authority to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, to determine the terms and provisions of the
respective Incentive Award agreements (which need not be identical) and to make
all other determinations necessary or advisable for the administration of the
Plan. All interpretations, determinations and actions by the Committee shall be
final, conclusive and binding upon all parties.
(c) No member of the Board of Directors or the Committee shall be
liable for any action or determination made in good faith by the Board of
Directors or the Committee with respect to the Plan or any Incentive Award
thereunder.
5. ELIGIBILITY
(a) All full-time salaried Employees (including officers and directors,
but excluding directors of the Company who are not also full-time employees of
the Company) who are engaged in performing management, supervisory, sales,
scientific or engineering services or who have been determined by the Committee
to be key Employees are eligible to receive Incentive Awards under the Plan.
Eligible employees may be designated individually or by groups or categories
(for example, by pay grade) as the Committee deems appropriate. Participation by
officers of the Company and any performance objectives relating to such officers
must be approved by the Committee. Participation by persons other than officers
and any performance objectives relating thereto may be approved by groups or
categories (for example, by pay grade) and authority to designate participants
who are not officers and to set or modify such targets may be delegated. The
Committee shall have authority, in its sole discretion, to determine and
designate from time to time those Eligible Persons who are to be granted
Incentive Awards, the type of Incentive Award to be granted, and the number of
shares of Common Stock or the amount of cash subject to each Incentive Award. In
making such determinations, the Committee may take into account the nature of
the services rendered by the respective Eligible Persons, their present and
potential contributions to the Company's success and such other factors as the
Committee in its sole discretion shall deem relevant.
(b) An Eligible Person who has been granted an Incentive Award may, if
he is otherwise eligible, be granted an additional Incentive Award.
6. FORMS OF INCENTIVE AWARDS
Incentive Awards may be granted in the following forms:
(a) Nonstatutory Stock Option in accordance with Section
7 of the Plan;
(b) Stock Appreciation Right, related to an Option in
accordance with Section 8 of the Plan;
(c) Stock Appreciation Right not related to an Option in
accordance with Section 9 of the Plan;
4
<PAGE> 5
(d) Stock Award in accordance with Section 10 of the
Plan;
(e) Restricted Stock in accordance with Section 10 of
the Plan;
(f) Cash Award in accordance with Section 1 of the Plan;
or
(g) Any combination of the foregoing.
7. NONSTATUTORY STOCK OPTIONS
The Committee may at any time and from time to time approve the grant
by the Company of Nonstatutory Stock Options to Eligible Persons to purchase
shares of Common Stock of the Company, and determine the specific Eligible
Persons to whom such Options may be granted, the number of shares subject to
each Option, the terms and provisions of the Option agreement, and the time or
times at which such Options may be exercised, subject to the following terms and
conditions:
(a) The date of grant shall be the date the Committee takes the
necessary action to approve the grant; provided, however, that if the minutes or
appropriate resolutions of the Committee provide that an Option is to be granted
as of a date in the future, the date of grant shall be such future date. In any
event, the intended Optionee must be an Eligible Person on the date of grant.
(b) The purchase price of Common Stock under each Nonstatutory Stock
Option shall be determined by the Committee, and will have an exercise price of
not less than the Fair Market Value of the Common Stock on the date the Option
is granted, subject to adjustment as provided in section 12 below. Options
cannot be cancelled and regranted at a lower price.
(c) Each Nonstatutory Stock Option shall become exercisable at such
time or times during its term as shall be determined by the Committee at the
time of grant. The Committee may accelerate the exercisability of any stock
option. Subject to the foregoing and with the approval of the Committee, all or
any part of the shares of Common Stock with respect to which the right to
purchase has accrued may be purchased by the Company at the time of such accrual
or at any time or times thereafter during the term of the Option.
(d) No Nonstatutory Stock Option may be exercised after ten years from
the date the Option is granted.
(e) Upon the exercise of a Nonstatutory Stock Option, the purchase
price shall be payable in full in cash or its equivalent acceptable to the
Company. In the discretion of the Committee, the purchase price may be paid by
the assignment and delivery to the Company of shares of Common Stock or a
combination of cash and such shares equal in value to the Option exercise price.
Any shares so assigned and delivered to the Company in payment or partial
payment of the purchase price shall be valued at their Fair Market Value on the
exercise date.
5
<PAGE> 6
(f) No fractional shares shall be issued pursuant to the exercise of a
Nonstatutory Stock Option, nor shall any cash payment be made in lieu thereof.
(g) A Nonstatutory Stock Option shall not be assignable or transferable
by the Optionee to whom granted otherwise than by will or the laws of descent
and distribution, and may be exercised during the lifetime of the Optionee only
by the Optionee; provided, however, that the Optionee may transfer an Option for
estate planning purposes for no consideration to (i) any member of his immediate
family, (ii) any trust or entity created solely for the benefit of the Optionee
or the members of the Optionee's immediate family or (iii) any custodian under
the Uniform Transfers to Minors Act or any similar act in effect in any state
solely for the benefit of a member of the Optionee's immediate family, and the
trustee or the transferee may exercise the transferred Option during or after
the lifetime of the Optionee, provided that the trustee or the transferee will
remain subject to all the terms and conditions applicable to the Option set
forth in the Plan or the Option agreement. For purposes of this Section 7(g),
"immediate family" means the Optionee's spouse, children and grandchildren. The
provisions of this Section 7(g) shall apply to all past and future Options
granted under the Plan regardless of the date of grant.
(h) No person shall have the rights and privileges of a shareholder
with respect to shares subject to or purchased under a Nonstatutory Stock Option
until the date appearing on the stock certificate issued upon the exercise of
the Option.
(i) To the extent that a Nonstatutory Stock Option is exercised, any
related Stock Appreciation Right shall be proportionately reduced by a number of
shares equal to the number of shares with respect to which the Option is
exercised.
(j) Upon approval of the Committee, the Company may repurchase a
previously granted stock option from an Optionee by mutual agreement before such
option has been exercised by payment to the Optionee of the amount per share by
which: (i) the Fair Market Value of the Common Stock subject to the option on
the date of purchase exceeds (ii) the option price.
(k) Each Nonstatutory Stock Option shall be evidenced by a written
agreement and may, but need not, include any other terms and conditions not
inconsistent with the Plan as the Committee may approve.
8. STOCK APPRECIATION RIGHTS RELATED TO OPTIONS
The Committee may at any time and from time to time approve the grant
by the Company of Stock Appreciation Rights to Eligible Persons that are related
to Nonstatutory Stock Options, and determine the specific Eligible Persons to
whom Stock Appreciation Rights may be granted, the terms and provisions of the
Stock Appreciation Rights agreements, and the time or times at which such Stock
Appreciation Rights may be exercised, subject to the following terms and
conditions:
6
<PAGE> 7
(a) The date of grant shall be the date the Committee takes the
necessary action to approve the grant; provided, however, that, if the minutes
of appropriate resolutions of the Committee provide that a Stock Appreciation
Right is to be granted as of a date in the future, the date of grant shall be
such future date. In any event, the intended Optionee must be an Eligible Person
on the date of grant.
(b) A Stock Appreciation Right may be granted in connection with a
Nonstatutory Stock Option, either at the time of the grant of such Option or at
any time thereafter during the term of the Option.
(c) A Stock Appreciation Right shall entitle the Holder of the related
Option, upon exercise of the Stock Appreciation Right, to surrender such Option,
or any portion thereof to the extent unexercised (subject to a limitation of 50%
of the shares of Common Stock subject to the Option), with respect to the number
of shares as to which Stock Appreciation Right is exercised, and to receive
payment of an amount computed pursuant to Section 8(e). Such Option shall, to
the extent so surrendered, thereupon cease to be exercisable.
(d) Subject to Section 8(g), a Stock Appreciation Right granted
hereunder shall be exercisable at such time or times, and only to the extent,
that a related Option is exercisable and shall not be transferable except to the
extent that such related Option may be transferable. The Stock Appreciation
Right shall be exercisable only by the Holder thereof or by such other person or
entity entitled to exercise the related Option in the event of the death of the
Holder.
(e) Subject to the right of the Committee to deliver cash in lieu of
shares of Common Stock, the number of shares of Common Stock which shall be
issuable upon the exercise of a Stock Appreciation Right shall be determined by
dividing:
(i) the number of shares of Common Stock as to which the
Stock Appreciation Right is exercised multiplied by the amount of the
appreciation in such shares (for this purposes the "appreciation" shall
be the amount by which the Fair Market Value of the shares of Common
Stock subject to the Stock Appreciation Right on the exercise date
exceeds an amount which shall be determined by the Committee at the
time of grant; by
(ii) the Fair Market Value of a share of Common Stock on the
exercise date.
(f) In lieu of issuing shares of Common Stock upon the exercise of a
Stock Appreciation Right, the Committee may elect to pay the holder of the Stock
Appreciation Right cash equal to the Fair Market Value on the exercise date of
any or all of the shares which would otherwise be issuable. No fractional shares
of Common Stock shall be issued upon the exercise of a Stock Appreciation Right;
instead, the holder of the Stock Appreciation Right shall be entitled to receive
a cash adjustment equal to the same fraction of the Fair Market Value of a share
of Common Stock on the exercise date or to purchase the portion necessary to
make a whole share at its Fair Market Value on the date of exercise.
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<PAGE> 8
(g) The Committee may impose such conditions on the exercise of a Stock
Appreciation Right as may be required to satisfy the requirements of Rule 16b-3
under the Securities Exchange Act of 1934 (or any other comparable provisions in
effect at the time or times in question). Without limiting the generality of the
foregoing, the Committee may determine that a Stock Appreciation Right may be
exercised only during the period beginning on the third business day and ending
on the twelfth business day following the publication of the Company's quarterly
and annual summarized financial data. Such publication shall be deemed to occur
when the data first appears on a wire service, in a financial news service or in
a newspaper of general circulation. The Company may provide written notification
to the Holder of a Stock Appreciation Right specifying the date on which such
financial data was published.
(h) No Stock Appreciation Right or related Option granted to an officer
of the Company may be exercised prior to six months after the date of grant
except in the event death or disability of the officer occurs prior to the
expiration of the six-month period.
(i) Each Stock Appreciation Right shall be evidenced by a written
instrument and may, but need not, include any other terms and conditions not
inconsistent with the Plan as the Committee may approve.
9. STOCK APPRECIATION RIGHTS UNRELATED TO OPTIONS
The Committee may at any time and from time to time approve the grant
by the Company to Eligible Persons of Stock Appreciation Rights that are
unrelated to Options, and determine the specific Eligible Persons to whom such
Stock Appreciation Rights may be granted, the terms and provisions of the Stock
Appreciation Rights agreements, and the time or times at which such Stock
Appreciation Rights may be exercised, subject to the following terms and
conditions.
(a) The date of grant shall be the date the Committee takes the
necessary action to approve the grant; provided, however, that if the minutes or
appropriate resolutions of the Committee provide that a Stock Appreciation Right
is to be granted as of a date in the future, the date of grant shall be such
future date. In any event, the intended Eligible Person must be an Eligible
Person on the date of grant.
(b) A Stock Appreciation Right shall entitle the Holder, upon exercise
of the Stock Appreciation Right, to receive payment of an amount determined by
dividing:
(i) the number of shares of Common Stock as to which the Stock
Appreciation Right is exercised multiplied by the amount of the
appreciation in such shares (for this purposes the "appreciation" shall
be the amount by which the Fair Market Value of the shares of Common
Stock subject to the Stock Appreciation Right on the exercise date
exceeds an amount which shall be determined by the Committee at the
time of grant; by
(ii) the Fair Market Value of a share of Common Stock on the
exercise date.
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<PAGE> 9
(c) In lieu of issuing shares of Common Stock upon the exercise of a
Stock Appreciation Right, the Committee may elect to pay the holder of the Stock
Appreciation Right cash equal to the Fair Market Value on the exercise date of
any or all of the shares which would otherwise be issuable. No fractional shares
of Common Stock shall be issued upon the exercise of a Stock Appreciation Right;
instead, the holder of the Stock Appreciation Right shall be entitled to receive
a cash adjustment equal to the same fraction of the Fair Market Value of the
share of Common Stock on the exercise date or to purchase the portion necessary
to make a whole share at its Fair Market Value on the date of exercise.
(d) The Committee may impose such conditions on the exercise of a Stock
Appreciation Right granted hereunder as may be required to satisfy the
requirements of Rule 16b-3 under the Securities Exchange Act of 1934 (or any
other comparable provisions in effect at the time or times in question). Without
limiting the generality of the foregoing, the Committee may determine that a
Stock Appreciation Right may be exercised only during the period beginning on
the third business day and ending on the twelfth business day following the date
of publication of the Company's quarterly and annual summarized financial data.
Such publication shall be deemed to occur when the data first appears on the
wire service, in a financial news service or in a newspaper of general
circulation. The Company may provide written notification to the Holder of a
Stock Appreciation Right specifying the date on which such financial data was
published.
(e) No Stock Appreciation Right granted to an officer of the Company
may be exercised prior to six months after the date of grant except in the event
death or disability of the officer occurs prior to the expiration of said
six-month period.
(f) A Stock Appreciation Right shall not be assignable or transferable
by the Holder otherwise than by will or the laws of descent and distribution,
and may be exercised during the lifetime of the Holder only by the Holder.
(g) Each Stock Appreciation Right hereunder shall be evidenced by a
written instrument and may, but need not, include any other terms and condition
not inconsistent with the Plan as the Committee may approve.
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<PAGE> 10
10. STOCK AWARD AND RESTRICTED STOCK
The Committee may at any time and from time to time approve the grant
by the Company of a Stock Award or Restricted Stock to Eligible Persons, and
determine the specific Eligible Persons to whom such Stock awards and restricted
stock may be granted, the number of shares to be granted and the terms and
provisions of such award of Common Stock. A stock award consists of the transfer
by the Company to a participant of shares of Common Stock, without other payment
therefor, as additional compensation for his/her services to the Company. A
share of restricted stock consists of shares of Common Stock which are sold or
transferred by the Company to a participant at a price which may be below their
Fair Market Value or for no payment, but subject to restrictions on their sale
or other transfer by the participant. The transfer of Common Stock pursuant to
stock awards and the transfer and sale of restricted stock shall be subject to
the following terms and conditions:
(a) The number of shares to be transferred or sold by the Company to a
participant pursuant to a stock award or as restricted stock shall be determined
by the Committee. The criteria of the grant of performance based restricted
stock will be established by the Committee at the date the restricted stock is
granted. If the Committee elects to grant time-based restricted stock, such
restricted stock shall vest over at least a three (3) year period.
(b) The Committee shall determine the prices, if any, at which shares
of restricted stock shall be sold to a participant, which may vary from time to
time and among participants and which may be below the Fair Market Value of such
shares of Common Stock at the date of sale.
(c) All shares of restricted stock transferred or sold hereunder shall
be subject to such restrictions as the Committee may determine, including,
without limitation any or all of the following:
(i) A prohibition against the sale, transfer, pledge or
other encumbrance of the shares of restricted stock, such prohibition
to lapse at such time or times as the Committee shall determine
(whether in annual or more frequent installments, at the time of the
death, disability or retirement of the holder of such shares, or
otherwise);
(ii) A requirement that the holder of shares of restricted
stock forfeit, or (in the case of shares sold to a participant) resell
back to the Company at his cost, all or a part of such shares in the
event of termination of his employment during any period in which such
shares are subject to restrictions;
(iii) A prohibition against employment of the holder of such
restricted stock by any competitor of the Company or a subsidiary of
the Company, or against such holder's dissemination of any secret or
confidential information belonging to the Company or a subsidiary of
the Company.
(d) In order to enforce the restrictions imposed by the Committee
pursuant to (c) above, the participant receiving restricted stock shall enter
into an agreement with the Company setting forth the conditions of the grant.
Shares of restricted stock shall be registered in the name of the participant
and deposited, together with a stock power endorsed in blank, with the Company.
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<PAGE> 11
(e) At the end of any time period during which the shares of restricted
stock are subject to forfeiture and restrictions on transfer, such shares will
be delivered free of all restrictions to the participant or to the participant's
legal representative, beneficiary or heir.
(f) Subject to the terms and conditions of the Plan, each participant
receiving restricted stock shall have all the rights of a stockholder with
respect to shares of stock during any period in which such shares are subject to
forfeiture and restrictions on transfer, including without limitation, the right
to vote such shares. Dividends paid in cash or property other than Common Stock
with respect to shares of restricted stock shall be paid to the participant
currently or, at the election of the participant, be reinvested by the
participant under the Company's Automatic Dividend Reinvestment Service. Shares
purchased with reinvested dividends shall not be restricted.
11. CASH AWARDS
The Committee may at any time and from time to time approve the payment
by the Company of a cash award to Eligible Persons. A cash award consists of a
monetary payment made by the Company to a participant as additional compensation
for his/her services to the Company. Payment of a cash award will normally
depend on achievement of performance objectives by the Company or by
individuals. The amount of any monetary payment constituting a cash award shall
be determined by the Committee in its sole discretion. Cash awards may be
subject to other terms and conditions, which may vary from time to time and
among participants, as the Committee determines to be appropriate.
12. ADJUSTMENT PROVISIONS
(a) Subject to Section 12(b), if the outstanding shares of Common Stock
of the Company are increased, decreased or exchanged for a different number or
kind of shares or other securities, or if additional shares or new or different
shares or other securities are distributed with respect to such shares of Common
Stock or other securities, through merger, consolidation, sale of all or
substantially all of the property of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other distribution with respect to such shares of Common Stock or other
securities, an appropriate and proportionate adjustment may be made in (i) the
maximum number and kind of shares provided in Section 3 of the Plan, (ii) the
number and kind of shares or other securities subject to the then outstanding
Options and Stock Appreciation Rights, and (iii) the price for each share or
other unit of any other securities subject to then outstanding Options and the
value of any then outstanding Stock Appreciation Rights without change in the
aggregate purchase price or value as to which such Options or Stock Appreciation
Rights remain exercisable.
(b) Notwithstanding any provision in this Plan or in any Incentive to
the contrary, (i) the restrictions on all shares of restricted stock awarded
shall lapse immediately; (ii) all outstanding Options and Stock Appreciation
Rights will become exercisable immediately; and (iii) all performance objectives
shall be deemed to be met and payment made immediately if any of the
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<PAGE> 12
following events (a "Change of Control") occur unless otherwise determined by
the Board of Directors and a majority of the members of the Incumbent Board (as
defined below):
(i) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either (i) the then
outstanding shares of common stock of the Company (the "Outstanding
Company Common Stock") or (ii) the combined voting power of the then
outstanding voting securities of the Company entitled to vote generally
in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection
(i), the following acquisitions shall not constitute a Change of
Control: (A) any acquisition directly from the Company, (B) any
acquisition by the Company, (C) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company or (D) any acquisition by any
corporation pursuant to a transaction which complies with clauses (A),
(B) and (C) of subsection (iii) of this paragraph (b); or
(ii) Individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any individual
becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(iii) Consummation of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all
of the assets of the Company (a "Business Combination"), in each case,
unless, following such Business Combination, (A) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries)
in substantially the same proportions as their ownership, immediately
prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be,
(B) no Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Company or such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of,
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<PAGE> 13
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to
the Business Combination and (C) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(iv) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(c) Adjustments under Sections 12(a) and 12(b) shall be made by the
Committee, whose determination as to what adjustments shall be made and the
extent thereof shall be final, binding and conclusive. No fractional interest
shall be issued under the Plan on account of any such adjustment.
13. GENERAL PROVISIONS
(a) With respect to any shares of Common Stock issued or transferred
under any provisions of the Plan, such shares may be issued or transferred
subject to such conditions, in addition to those specifically provided in the
Plan, as the Committee may direct.
(b) Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any Holder any right to continue in the employ of the Company
or any of its subsidiaries or affect the right of the Company to terminate the
employment of any Holder at any time with or without cause.
(c) No shares of Common Stock shall be issued or transferred pursuant
to an Incentive Award unless and until all then applicable requirements imposed
by federal and state securities and other laws, rules and regulations and by any
regulatory agencies having jurisdiction, and by any stock exchanges upon which
the Common Stock may be listed, shall have been fully met. As a condition
precedent to the issuance of shares pursuant to the grant or exercise of an
Incentive Award, the Company may require the Holder to take any reasonable
action to meet such requirements.
(d) No Holder (individually or as a member of a group) and no
beneficiary or other person claiming under or through such Holder shall have any
right, title or interest in or to any shares of Common Stock allocated or
reserved under the Plan or subject to any Incentive Award except as to such
shares of Common Stock, if any, that have been issued or transferred to such
Holder.
(e) The Company may make such provisions as it deems appropriate for
the withholding of any taxes that the Company or any subsidiary corporation
determines it is required to withhold in connection with any Incentive Award.
(f) No Incentive Award and no right under the Plan, contingent or
otherwise, shall be assignable (except as provided in Section 7(g) of the Plan),
or subject to any encumbrance, pledge
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<PAGE> 14
or charge of any nature except that, under such rules and regulations as the
Company may establish pursuant to the terms of the Plan, a beneficiary may be
designated with respect to an Incentive Award in the event of the death of the
Holder of such Incentive Award and except also, that if such beneficiary is the
executor or administrator of the estate of the Holder of such Incentive Award,
then any rights with respect to such Incentive Award may be transferred to the
person or persons or entity (including a trust) entitled thereto under the will
of the holder of such Incentive Award, or in the case of intestacy, under the
laws relating to intestacy.
(g) Nothing in the Plan is intended to be a substitute for, or to
preclude or limit the establishment of, any other plan, practice or arrangement
for the payment of compensation or benefits to employees generally, or to any
class or group of employees that the Company now has or may hereafter lawfully
put into effect, including, without limitation, any retirement, pension,
insurance, stock purchase, incentive compensation or bonus plan.
(h) The Company may make a loan or guarantee a loan to an Optionee
(including an Optionee who is an officer of the Company or any subsidiary
corporation of the Company) in connection with the exercise of an Option in an
amount not to exceed the aggregate exercise price of the Option being exercised
and any federal and state taxes payable in connection with such exercise for the
purpose of assisting such Optionee to exercise such Option. The Company may also
make a loan or guarantee a loan to an optionee (including an optionee who is an
officer of the Company or any subsidiary corporation of the Company) in
connection with the exercise of an option granted under the Smith International,
Inc. 1971 and 1982 Stock Option Plans in an amount not to exceed the aggregate
exercise price of the option being exercised and any federal and state taxes
payable in connection with such exercise for the purpose of assisting such
optionee to exercise such option. Any such loan or guarantee may be secured by
shares of Common Stock or other collateral deemed adequate by the Committee and
shall comply in all respects with all applicable laws and regulations. The Board
of Directors and the Committee may adopt policies regarding eligibility for such
loans and guarantees, the maximum amounts thereof and any terms and conditions
not specified in the Plan upon which such loans will be made and guarantees
extended.
(i) The Company shall have the right to withhold from any payments made
under the Plan or to collect as a condition of payment, any taxes required by
law to be withheld. At any time when a participant is required to pay to the
Company an amount required to be withheld under applicable income tax laws in
connection with a distribution of Common Stock or upon exercise of an option or
Stock Appreciation Right, the participant may satisfy this obligation in whole
or in part by electing (the "Election") to have the Company withhold from the
distribution shares of Common Stock having a value equal to the amount required
to be withheld. The value of the shares to be withheld shall be based on the
Fair Market Value of the Common Stock on the date that the amount of tax to be
withheld shall be determined ("Tax Date"). Each Election must be made prior to
the Tax Date. The Committee may disapprove of any Election, may suspend or
terminate the right to make Elections, or may provide with respect to any
Incentive that the right to make Elections shall not apply to such Incentive. An
Election is irrevocable.
(j) If a participant is an officer of the Company within the meaning of
Section 16 of the 1934 Act, then an Election is subject to the following
additional restrictions:
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<PAGE> 15
(i) No Election shall be effective for a Tax Date which occurs
within six months of the grant of the award, except that this
limitation shall not apply in the event death or disability of the
participant occurs prior to the expiration of the six-month period.
(ii) The Election must be made either six months prior to the
Tax Date or must be made during a period beginning on the third
business day following the date of release for publication of the
Company's quarterly or annual summary statements of sales and earnings
and ending on the twelfth business day following such date.
(k) Anything in this Plan to the contrary notwithstanding, the Company,
may if it shall determine it necessary or desirable for any reason, at the time
of award of any Incentive or the issuance of any shares of Common Stock pursuant
to any Incentive, require the recipient of the Incentive, as a condition to the
receipt thereof or to the receipt of shares of Common Stock issued pursuant
thereto, to deliver to the Company a written representation of present intention
to acquire the Incentive or the shares of Common Stock issued pursuant thereto
for his own account for investment and not for distribution.
14. AMENDMENT AND TERMINATION
(a) The Board of Directors shall have the power, in its discretion, to
amend, suspend or terminate the Plan at any time. No such amendment shall,
without approval of the shareholders of the Company, except as provided in
Section 12 of the Plan:
(i) Change the class of persons eligible to receive
Incentive Awards under the Plan;
(ii) Materially increase the benefits accruing to Eligible
Persons under the Plan;
(iii) Increase the number of shares of Common Stock subject
to the Plan; or
(iv) Transfer the administration of the Plan to any person
who is not a Disinterested Person.
(b) The Committee may, with the consent of a Holder, make such
modifications in the terms and conditions of an Option or a Stock Appreciation
Right as it deems advisable.
(c) No amendment, suspension or termination of the Plan shall, without
the consent of the Holder, alter, terminate, impair or adversely affect any
right or obligation under any Incentive Award previously granted under the Plan.
(d) No amendment to the Plan shall be made that would permit the
granting of Incentive Awards to members of the Committee.
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<PAGE> 16
(e) A Stock Appreciation Right or an Option held by a person who was an
Employee at the time such Right or Option was granted shall terminate if and
when the Holder ceases to be an Employee, except as follows:
(i) If the employment of an Employee is terminated for cause,
for which the Company shall be the sole judge, or if the Employee
voluntarily resigns, all of the Stock Appreciation Rights and Options
of the Employee shall expire immediately. Retirement with the consent
of the Company shall not be deemed a voluntary resignation for purposes
of this subparagraph (i) .
(ii) If the employment of an Employee is terminated by the
Company other than for cause, for which the Company shall be the sole
judge, then the Stock Appreciation Rights and Options expire one year
thereafter unless by their terms they expire sooner. During said
period, the Stock Appreciation Rights and Options may be exercised in
accordance with their terms, but only to the extent exercisable on the
date of termination of employment.
(iii) If the employee retires at normal retirement age or
retires with the consent of the Company at an earlier date the Stock
Appreciation Rights and Options of the Employee shall expire three
years thereafter unless by their terms they expire sooner. During said
period, the Stock Appreciation Rights and Options may be exercised in
accordance with their terms, but only to the extent exercisable on the
date of retirement.
(iv) If an Employee dies or becomes permanently and totally
disabled while employed by the Company or a parent or subsidiary
corporation, the Stock Appreciation Rights and Options of the Employee
shall expire three years after the date of death or permanent and total
disability unless by their terms they expire sooner. If the Employee
dies or becomes permanently and totally disabled within the one-year
period referred to in subparagraph (ii) above, the Stock Appreciation
Rights and Options shall expire one year after the date of death or
permanent and total disability, unless by their terms they expire
sooner. If the Employee dies or becomes permanently and totally
disabled within the three-year period referred to in subparagraph (iii)
above, the Stock Appreciation Rights and Options shall expire upon the
later of three years after retirement or one year after the date of
death or permanent and total disability, unless by their terms they
expire sooner. During said periods the Stock Appreciation Rights and
Options may be exercised by the Employee, or in the event of the death
of the Employee, the Stock Appreciation Rights and Options may be
exercised by the Employee's designated beneficiaries or personal
representatives or the trusts, entities or persons to whom his rights
under the Stock Appreciation Rights and Options have been transferred,
in accordance with Section 7(g) of the Plan, or have passed by will or
the laws of descent and distribution, in accordance with their terms,
but only to the extent exercisable on the date of retirement or
termination of employment.
(v) Notwithstanding the above, a Stock Appreciation Right or
Option may not be exercised after the expiration of ten years from the
date the Stock Appreciation Right or Option is granted.
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<PAGE> 17
(f) The Committee may in a particular case provide for earlier
termination or expiration periods for any Stock Appreciation Right or Option but
may not extend any of the periods provided for in this section.
(g) The Committee may in its sole discretion determine, with respect to
a Stock Appreciation Right or Option, that any Holder who is on leave of absence
for any reason will be considered as still in the employ of the Company,
provided that the Stock Appreciation Right or Option shall be exercisable during
a leave of absence only as to the amount of number of shares with respect to
which it was exercisable at the commencement of such leave of absence.
15. EFFECTIVE DATE OF PLAN AND DURATION OF PLAN
This Plan shall become effective upon adoption by the Board of
Directors of the Company (February 6, 1989) and Incentive Awards may be made
under the Plan at any time thereafter, provided, however, that no shares of
Common Stock may be issued under the Plan, no Stock Appreciation Rights granted
under the Plan may be exercised and no Cash Award may be paid prior to
completion of the following: (a) the approval of the Plan by shareholders owning
a majority of the outstanding shares of Common Stock of the Company, with the
votes of any officers who are shareholders not being counted for the purpose of
determining a majority, (b) the registration of the Plan and securities to be
issued in connection therewith under the Securities Act of 1933, and (c) the
listing of the shares of Common Stock reserved for issuance under the Plan on
the New York Stock Exchange, Inc. and the Pacific Stock Exchange, Inc. Unless
previously terminated by the Board of Directors, the Plan shall terminate at the
close of business on April 22, 2008, and no Incentive Award may be granted under
the Plan thereafter, but such termination shall not affect any Incentive Award
issued or granted on or prior to said date.
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<PAGE> 1
EXHIBIT 10.11
CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT
AGREEMENT by and between Smith International, Inc., a Delaware
corporation (the "Company") and DOUGLAS L. ROCK (the "Executive"), dated as of
the 4th day of January, 2000.
The Board of Directors of the Company (the "Board"), has determined
that it is in the best interests of the Company and its shareholders to assure
that the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control
(as defined below) of the Company. The Board believes it is imperative to
diminish the inevitable distraction of the Executive by virtue of the personal
uncertainties and risks created by a pending or threatened Change of Control
and to encourage the Executive's full attention and dedication to the Company
currently and in the event of any threatened or pending Change of Control, and
to provide the Executive with compensation and benefits arrangements upon a
Change of Control which ensure that the compensation and benefits expectations
of the Executive will be satisfied and which are competitive with those of
other corporations. Therefore, in order to accomplish these objectives, the
Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Other Agreements. The Company and the Executive are parties to: (i)
An Employment Agreement dated as of December 10, 1987 (the "Employment
Agreement"); (ii) an Amendment to Employment Agreement dated as of October 16,
1989 (the "Amendment") and (ii) a First Amendment to the Amendment to the
Employment Agreement dated as of November 12, 1992 (the "First Amendment").
Upon full execution and delivery of this Agreement, the parties agree that the
Amendment and the First Amendment shall be cancelled and of no force and effect
as of January 4, 2000. The terms of the Employment Agreement, as written,
without giving effect to the Amendment or the First Amendment, shall remain in
force and effect;
<PAGE> 2
provided that in the event of a Change of Control, the terms of this Agreement
shall control, except with respect to any Accrued Obligations, as defined
herein.
2. Certain Definitions. (a) The "Effective Date", shall mean the first
date during the Change of Control Period (as defined in Section 2 (b)) on which
a Change of Control (as defined in Section 2) occurs. Anything in this
Agreement to the contrary notwithstanding, if a Change of Control occurs and if
the Executive's employment with the Company is terminated prior to the date on
which the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control
or (ii) otherwise arose in connection with or anticipation of a Change of
Control, then for all purposes of this Agreement the "Effective Date" shall
mean the date immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on
the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the date one year after the date hereof,
and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall be
automatically extended so as to terminate three years from such Renewal Date,
unless at least 60 days prior to the Renewal Date the Company shall give notice
to the Executive that the Change of Control Period shall not be so extended.
3. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
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then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies
with clauses (i), (ii) and (iii) of subsection (c) of this Section 3; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of
the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies
or consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the Company
(a "Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60%
of, respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or
more subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business
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Combination of the Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be, (ii) no Person (excluding any
corporation resulting from such Business Combination or any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 20% or more
of, respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business Combination and
(iii) at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of
the action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
4. Employment Period. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the
employ of the Company subject to the terms and conditions of this Agreement,
for the period commencing on the Effective Date and ending on the third
anniversary of such date (the "Employment Period").
5. Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, (A) the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities
shall be at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any time during the
120-day period immediately preceding the Effective Date and (B) the Executive's
services shall be performed at the location where the Executive was employed
immediately preceding the Effective Date or any office or location less than 35
miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote reasonable attention and
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time during normal business hours to the business and affairs of the Company
and, to the extent necessary to discharge the responsibilities assigned to the
Executive hereunder, to use the Executive's reasonable best efforts to perform
faithfully and efficiently such responsibilities. During the Employment Period
it shall not be a violation of this Agreement for the Executive to (A) serve on
corporate, civic or charitable boards or committees, (B) deliver lectures,
fulfill speaking engagements or teach at educational institutions and (C)
manage personal investments, so long as such activities do not significantly
interfere with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement. It is expressly
understood and agreed that to the extent that any such activities have been
conducted by the Executive prior to the Effective Date, the continued conduct
of such activities (or the conduct of activities similar in nature and scope
thereto) subsequent to the Effective Date shall not thereafter be deemed to
interfere with the performance of the Executive's responsibilities to the
Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive
shall be awarded, for each fiscal year ending during the Employment Period, an
annual bonus (the
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<PAGE> 6
"Annual Bonus") in cash (i) under the Company's Annual Incentive Plan based
upon meeting the targets in the Annual Incentive Plan, provided that the
Executive's target bonus percentage shall be at least equal to the Executive's
target bonus percentage for the fiscal year prior to the Effective Date or
equal to an increase in the target bonus percentage given to any similarly
situated executive after the Effective Date, or, if higher, (ii) under any
annual incentive plan or discretionary award by the Company to similarly
situated executives which is enacted or approved after the Effective Date. Each
such Annual Bonus shall be paid no later than the end of the third month of the
fiscal year next following the fiscal year for which the Annual Bonus is
awarded, unless the Executive shall elect to defer the receipt of such Annual
Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive,
savings and retirement plans, practices, policies and programs applicable
generally to other peer executives of the Company and its affiliated companies,
but in no event shall such plans, practices, policies and programs provide the
Executive with incentive opportunities (measured with respect to both regular
and special incentive opportunities, to the extent, it any, that such
distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at
any time during the 120-day period immediately preceding the Effective Date or
if more favorable to the Executive, those provided generally at any time after
the Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's-family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit
plans, practices, policies and programs provided by the Company and its
affiliated companies (including, without limitation, medical, prescription,
dental, disability, employee life, group life, accidental death and travel
accident insurance plans and programs) to the extent applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide
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the Executive with benefits which are less favorable, in the aggregate, than
the most favorable of such plans, practices, policies and programs in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, those provided
generally at any time after the Effective Date to other peer executives of the
Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred
by the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally
at any time thereafter with respect to other peer executives of the Company and
its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive
shall be entitled to fringe benefits, including, without limitation, tax and
financial planning services, payment of club dues, and, if applicable, use of
an automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing
provided to the Executive by the Company and its affiliated companies at any
time during the 120-day period immediately preceding the Effective Date or, if
more favorable to the Executive, as provided generally at any time thereafter
with respect to other peer executives of the Company and its affiliated
companies.
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(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated companies as
in effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies.
6. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 13(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of
such notice by the Executive (the "Disability Effective Date"), provided that,
within the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this
Agreement, "Disability" shall mean the absence of the Executive from the
Executive's duties with the Company on a full-time basis for 180 consecutive
business days as a result of incapacity due to mental or physical illness which
is determined to be total and permanent by a physician selected by the Company
or its insurers and acceptable to the Executive or the Executive's legal
representative.
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive
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Officer of the Company which specifically identifies the manner in
which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the part
of the Executive, shall be considered "willful" unless it is done, or omitted
to be done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution
duly adopted by the Board or upon the instructions of the Chief Executive
Officer or a senior officer of the Company or based upon the advice of counsel
for the Company shall be conclusively presumed to be done, or omitted to be
done, by the Executive in good faith and in the best interests of the Company.
The cessation of employment of the Executive shall not be deemed to be for
Cause unless and until there shall have been delivered to the Executive a copy
of a resolution duly adopted by the affirmative vote of not less than
three-quarters of the entire membership of the Board at a meeting of the Board
called and held for such purpose (after reasonable notice is provided to the
Executive and the Executive is given an opportunity, together with counsel, to
be heard before the Board), finding that, in the good faith opinion of the
Board, the Executive is guilty of the conduct described in subparagraph (i) or
(ii) above, and specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this Agreement, or
any other action by the Company which results in a diminution in such
position,
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authority, duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith
and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions
of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any office
or location other than as provided in Section 5(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section
12(c) of this Agreement.
For purposes of this Section 6(c), any good faith determination of
"Good Reason" made by the Executive shall be conclusive. Anything in this
Agreement to the contrary notwithstanding, a termination by the Executive for
any reason during the 30-day period immediately following the first anniversary
of the Effective Date shall be deemed to be a termination for Good Reason for
all purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause,
or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 13(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which indicates the specific
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termination provision in this Agreement relied upon, (ii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive's employment under the
provision so indicated and (iii) if the Date of Termination (as defined below)
is other than the date of receipt of such notice, specifies the termination
date (which date shall be not more than thirty days after the giving of such
notice). The failure by the Executive or the Company to set forth in the Notice
of Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of the Executive or the Company,
respectively, hereunder or preclude the Executive or the Company, respectively,
from asserting such fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the
case may be.
7. Obligations of the Company upon Termination. (a) Good Reason; Other
Than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the
following amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the higher of (I) the
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highest Annual Bonus paid to the Executive for the last three full
fiscal years prior to the Effective Date and (II) the Annual Bonus
paid or payable, including any bonus or portion thereof which has been
earned but deferred (and annualized for any fiscal year consisting of
less than twelve full months or during which the Executive was
employed for less than twelve full months), for the most recently
completed fiscal year during the Employment Period, if any (such
higher amount being referred to as the "Highest Annual Bonus") and (y)
a fraction, the numerator of which is the number of days in the
current fiscal year through the Date of Termination, and the
denominator of which is 365 and (3) any compensation previously
deferred by the Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in
clauses (1), (2), and (3) and any amounts accrued under the Employment
Agreement with the Executive not otherwise fully accrued under the
terms of this Agreement shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest
Annual Bonus; and
C. an amount equal to the excess of (a) the actuarial
equivalent of the benefit under any excess or supplemental retirement
plan in which the Executive participates (the "SERP") which the
Executive would receive if the Executive's employment continued for
three years after the Date of Termination assuming for this purpose
that all accrued benefits are fully vested, and, assuming that the
Executive's compensation in each of the three years is that required
by Section 5(b)(i) and Section 5(b)(ii), over (b) the actuarial
equivalent of the Executive's actual benefit (paid or payable), if
any, under the SERP as of the Date of Termination;
(ii) for three years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate
plan, program, practice or policy, the Company shall continue benefits
to the Executive and/or the Executive's family at least
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equal to those which would have been provided to them in accordance
with the plans, programs, practices and policies described in Section
5(b)(iv) of this Agreement if the Executive's employment had not been
terminated or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives
of the Company and its affiliated companies and their families,
provided, however, that if the Executive becomes reemployed with
another employer and is eligible to receive medical or other welfare
benefits under another employer provided plan, the medical and other
welfare benefits described herein shall be secondary to those provided
under such other plan during such applicable period of eligibility.
For purposes of determining eligibility (but not the time of
commencement of benefits) of the Executive for retiree benefits
pursuant to such plans, practices, programs and policies, the
Executive shall be considered to have remained employed until three
years after the Date of Termination and to have retired on the last
day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which
shall be selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or
agreement of the Company and its affiliated companies (such other
amounts and benefits shall be hereinafter referred to as the "Other
Benefits").
(b) Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits. Accrued Obligations shall be
paid to the Executive's estate or beneficiary, as applicable, in a lump sum in
cash within 30 days of the Date of Termination. With respect to the provision
of Other Benefits, the term Other
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Benefits as utilized in this Section 7(b) shall include, without limitation,
and the Executive's estate and/or beneficiaries shall be entitled to receive,
benefits at least equal to the most favorable benefits provided by the Company
and affiliated companies to the estates and beneficiaries of peer executives of
the Company and such affiliated companies under such plans, programs, practices
and policies relating to death benefits, if any, as in effect with respect to
other peer executives and their beneficiaries at any time during the 120-day
period immediately preceding the Effective Date or, if more-favorable to the
Executive's estate and/or the Executive's beneficiaries, as in effect on the
date of the Executive's death with respect to other peer executives of the
Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement
shall terminate without further obligations to the Executive, other than for
payment of Accrued Obligations and the timely payment or provision of Other
Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in
cash within 30 days of the Date of Termination. With respect to the provision
of Other Benefits, the term Other Benefits as utilized in this Section 7(c)
shall include, and the Executive shall be entitled after the Disability
Effective Date to receive, disability and other benefits at least equal to the
most favorable of those generally provided by the Company and its affiliated
companies to disabled executives and/or their families in accordance with such
plans, programs, practices and policies relating to disability, if any, as in
effect generally with respect to other peer executives and their families at
any time during the 120-day period immediately preceding the Effective Date or,
if more favorable to the Executive and/or the Executive's family, as in effect
at any time thereafter generally with respect to other peer executives of the
Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement
shall terminate without further obligations to the Executive other than the
obligation to pay to the Executive (x) his Annual Base Salary through the Date
of Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent
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theretofore unpaid. If the Executive voluntarily terminates employment during
the Employment Period, excluding a termination for Good Reason, this Agreement
shall terminate without further obligations to the Executive, other than for
Accrued Obligations and the timely payment or provision of Other Benefits. In
such case, all Accrued Obligations shall be paid to the Executive in a lump sum
in cash within 30 days of the Date of Termination.
8. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor, subject to Section
13(f), shall anything herein limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice or
program of or any contract or agreement with the Company or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract
or agreement except as explicitly modified by this Agreement.
9. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any setoff, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others. In no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and such amounts
shall not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive
or others of the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance thereof (including
as a result of any contest by the Executive about the amount of any payment
pursuant to this Agreement), plus in each case
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interest on any delayed payment at the applicable Federal rate provided for in
Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the
"Code").
10. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 10) (a "Payment") would be
subject to excise or other similar tax, or federal income tax above the rate
ordinarily applicable to wages and salaries paid in the ordinary course of
business, whether as a result of the provisions of Sections 280G and 4999 of
the Code, any similar or analogous provisions of any statute or regulation
adopted subsequent to the date hereof, or otherwise, or any interest or
penalties are incurred by the Executive with respect to such tax (such excise
tax, other similar tax or federal income tax, together with any such interest
and penalties, are hereinafter collectively referred to as the "Excise Tax"),
then the Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by the Executive of
all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing
provisions of this Section 10(a), if it shall be determined that the Executive
is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of
the greatest amount (the "Reduced Amount") that could be paid to the Executive
such that the receipt of Payments would not give rise to any Excise Tax, then
no Gross-Up Payment shall be made to the Executive and the Payments, in the
aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 10(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the
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amount of such Gross-Up Payment and the assumptions to be utilized in arriving
at such determination, shall be made by Arthur Andersen L.L.P. or such other
certified public accounting firm as may be designated by the Executive (the
"Accounting Firm") which shall provide detailed supporting calculations both to
the Company and the Executive within 15 business days of the receipt of notice
from the Executive that there has been a Payment, or such earlier time as is
requested by the Company. In the event that the Accounting Firm is serving as
accountant or auditor for the individual, entity or group effecting the Change
of Control, the Executive shall appoint another nationally recognized
accounting firm to make the determinations required hereunder (which accounting
firm shall then be referred to as the Accounting Firm hereunder). All fees and
expenses of the Accounting Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 10(c) and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature
of such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or such
shorter period ending on the date that any payment
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of taxes with respect to such claim is due). If the Company notifies the
Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an. attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions
of this Section 10(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct the Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall
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indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of the statute
of limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due is
limited solely to such contested amount. Furthermore, the Company's control of
the contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 10(c), the Executive becomes entitled to
receive any refund with respect to such claim, the Executive shall (subject to
the Company's complying with the requirements of Section 10(c)) promptly pay to
the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to Section 10(c), a
determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the expiration
of 30 days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance shall offset,
to the extent thereof, the amount of Gross-Up Payment required to be paid.
11. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the
Executive during the Executive's employment by the Company or any of its
affiliated companies and which shall not be or become public knowledge (other
than by acts by the Executive or representatives of the Executive in violation
of this Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal process,
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communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it. In no event shall an asserted
violation of the provisions of this Section 10 constitute a basis for deferring
or withholding any amounts otherwise payable to the Executive under this
Agreement.
12. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean the
Company as hereinbefore defined and any successor to its business and/or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
13. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, without reference
to principles of conflict of laws. The captions of this Agreement are not part
of the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by
the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as
follows:
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If to the Executive:
Douglas L. Rock
If to the Company:
Smith International, Inc.
16740 Hardy Street
Houston, TX 77032
Fax: (281) 233-5996
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section l (a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be
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terminated by either the Executive or the Company at any time prior to the
Effective Date, in which case the Executive shall have no further rights under
this Agreement ; provided, that this Agreement may not be terminated by the
Company if it is reasonably demonstrated by the Executive that such termination
(i) was at the request of a third party who has taken steps reasonably
calculated to effect a Change of Control or (ii) otherwise arose in connection
with or anticipation of a Change of Control. From and after the Effective Date
this Agreement shall supersede any other agreement between the parties with
respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the
Company has caused these presents to be executed in its name on its behalf, all
as of the day and year first above written.
/s/ DOUGLAS L. ROCK
-------------------------------
DOUGLAS L. ROCK
SMITH INTERNATIONAL, INC.
By: /s/ NEAL S. SUTTON
--------------------------
Neal S. Sutton
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EXHIBIT 10.12
CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT
AGREEMENT by and between Smith International, Inc., a Delaware
corporation (the "Company") and NEAL S. SUTTON (the "Executive"), dated as of
the 4th day of January, 2000.
The Board of Directors of the Company (the "Board"), has determined
that it is in the best interests of the Company and its shareholders to assure
that the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company. The Board believes it is imperative to diminish
the inevitable distraction of the Executive by virtue of the personal
uncertainties and risks created by a pending or threatened Change of Control and
to encourage the Executive's full attention and dedication to the Company
currently and in the event of any threatened or pending Change of Control, and
to provide the Executive with compensation and benefits arrangements upon a
Change of Control which ensure that the compensation and benefits expectations
of the Executive will be satisfied and which are competitive with those of other
corporations. Therefore, in order to accomplish these objectives, the Board has
caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Other Agreements. The Company and the Executive are parties to: (i)
An Employment Agreement dated as of January 2, 1991 (the "Employment
Agreement"); (ii) an Amendment to Employment Agreement dated as of January 2,
1991 (the "Amendment") and (ii) a First Amendment to the Amendment to the
Employment Agreement dated as of November 12, 1992 (the "First Amendment"). Upon
full execution and delivery of this Agreement, the parties agree that the
Amendment and the First Amendment shall be cancelled and of no force and effect
as of January 4, 2000. The terms of the Employment Agreement, as written,
without giving effect to the Amendment or the First Amendment, shall remain in
force and effect; provided that
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in the event of a Change of Control, the terms of this Agreement shall control,
except with respect to any Accrued Obligations, as defined herein.
2. Certain Definitions. (a) The "Effective Date", shall mean the first
date during the Change of Control Period (as defined in Section 2 (b)) on which
a Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on
the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the date one year after the date hereof,
and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall be
automatically extended so as to terminate three years from such Renewal Date,
unless at least 60 days prior to the Renewal Date the Company shall give notice
to the Executive that the Change of Control Period shall not be so extended.
3. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the
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Company (the "Outstanding Company Common Stock") or (ii) the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the Company or
(iv) any acquisition by any corporation pursuant to a transaction which complies
with clauses (i), (ii) and (iii) of subsection (c) of this Section 3; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in
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substantially the same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding any
corporation resulting from such Business Combination or any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of the
then outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Business Combination and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
4. Employment Period. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the employ
of the Company subject to the terms and conditions of this Agreement, for the
period commencing on the Effective Date and ending on the third anniversary of
such date (the "Employment Period").
5. Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, (A) the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 120-day period
immediately preceding the Effective Date and (B) the Executive's services shall
be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.
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(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
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(ii) Annual Bonus. In addition to Annual Base Salary, the Executive
shall be awarded, for each fiscal year ending during the Employment Period, an
annual bonus (the "Annual Bonus") in cash (i) under the Company's Annual
Incentive Plan based upon meeting the targets in the Annual Incentive Plan,
provided that the Executive's target bonus percentage shall be at least equal to
the Executive's target bonus percentage for the fiscal year prior to the
Effective Date or equal to an increase in the target bonus percentage given to
any similarly situated executive after the Effective Date, or, if higher, (ii)
under any annual incentive plan or discretionary award by the Company to
similarly situated executives which is enacted or approved after the Effective
Date. Each such Annual Bonus shall be paid no later than the end of the third
month of the fiscal year next following the fiscal year for which the Annual
Bonus is awarded, unless the Executive shall elect to defer the receipt of such
Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, it any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's-family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and
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programs) to the extent applicable generally to other peer executives of the
Company and its affiliated companies, but in no event shall such plans,
practices, policies and programs provide the Executive with benefits which are
less favorable, in the aggregate, than the most favorable of such plans,
practices, policies and programs in effect for the Executive at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall
be entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the
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Executive, as provided generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
6. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 13(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure
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resulting from incapacity due to physical or mental illness), after a
written demand for substantial performance is delivered to the
Executive by the Board or the Chief Executive Officer of the Company
which specifically identifies the manner in which the Board or Chief
Executive Officer believes that the Executive has not substantially
performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the part
of the Executive, shall be considered "willful" unless it is done, or omitted to
be done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices,
titles and reporting requirements),
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authority, duties or responsibilities as contemplated by Section 4(a)
of this Agreement, or any other action by the Company which results in
a diminution in such position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent
action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given
by the Executive;
(iii) the Company's requiring the Executive to be based at any office
or location other than as provided in Section 5(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section 12(c)
of this Agreement.
For purposes of this Section 6(c), any good faith determination of
"Good Reason" made by the Executive shall be conclusive. Anything in this
Agreement to the contrary notwithstanding, a termination by the Executive for
any reason during the 30-day period immediately following the first anniversary
of the Effective Date shall be deemed to be a termination for Good Reason for
all purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party
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hereto given in accordance with Section 13(b) of this Agreement. For purposes of
this Agreement, a "Notice of Termination" means a written notice which indicates
the specific termination provision in this Agreement relied upon, (ii) to the
extent applicable, sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated and (iii) if the Date of Termination (as defined
below) is other than the date of receipt of such notice, specifies the
termination date (which date shall be not more than thirty days after the giving
of such notice). The failure by the Executive or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of the Executive or the Company,
respectively, hereunder or preclude the Executive or the Company, respectively,
from asserting such fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
7. Obligations of the Company upon Termination. (a) Good Reason; Other
Than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within
30 days after the Date of Termination the aggregate of the following
amounts:
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A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the higher of (I) the highest Annual Bonus paid to the
Executive for the last three full fiscal years prior to the Effective
Date and (II) the Annual Bonus paid or payable, including any bonus or
portion thereof which has been earned but deferred (and annualized for
any fiscal year consisting of less than twelve full months or during
which the Executive was employed for less than twelve full months), for
the most recently completed fiscal year during the Employment Period,
if any (such higher amount being referred to as the "Highest Annual
Bonus") and (y) a fraction, the numerator of which is the number of
days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (3) any compensation previously
deferred by the Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in
clauses (1), (2), and (3) and any amounts accrued under the Employment
Agreement with the Executive not otherwise fully accrued under the
terms of this Agreement shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest
Annual Bonus; and
C. an amount equal to the excess of (a) the actuarial
equivalent of the benefit under any excess or supplemental retirement
plan in which the Executive participates (the "SERP") which the
Executive would receive if the Executive's employment continued for
three years after the Date of Termination assuming for this purpose
that all accrued benefits are fully vested, and, assuming that the
Executive's compensation in each of the three years is that required by
Section 5(b)(i) and Section 5(b)(ii), over (b) the actuarial equivalent
of the Executive's actual benefit (paid or payable), if any, under the
SERP as of the Date of Termination;
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(ii) for three years after the Executive's Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which
would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 5(b)(iv) of this
Agreement if the Executive's employment had not been terminated or, if
more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is eligible to
receive medical or other welfare benefits under another employer
provided plan, the medical and other welfare benefits described herein
shall be secondary to those provided under such other plan during such
applicable period of eligibility. For purposes of determining
eligibility (but not the time of commencement of benefits) of the
Executive for retiree benefits pursuant to such plans, practices,
programs and policies, the Executive shall be considered to have
remained employed until three years after the Date of Termination and
to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which
shall be selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or
agreement of the Company and its affiliated companies (such other
amounts and benefits shall be hereinafter referred to as the "Other
Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued
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Obligations and the timely payment or provision of Other Benefits. Accrued
Obligations shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date of Termination.
With respect to the provision of Other Benefits, the term Other Benefits as
utilized in this Section 7(b) shall include, without limitation, and the
Executive's estate and/or beneficiaries shall be entitled to receive, benefits
at least equal to the most favorable benefits provided by the Company and
affiliated companies to the estates and beneficiaries of peer executives of the
Company and such affiliated companies under such plans, programs, practices and
policies relating to death benefits, if any, as in effect with respect to other
peer executives and their beneficiaries at any time during the 120-day period
immediately preceding the Effective Date or, if more-favorable to the
Executive's estate and/or the Executive's beneficiaries, as in effect on the
date of the Executive's death with respect to other peer executives of the
Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 7(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without
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further obligations to the Executive other than the obligation to pay to the
Executive (x) his Annual Base Salary through the Date of Termination, (y) the
amount of any compensation previously deferred by the Executive, and (z) Other
Benefits, in each case to the extent theretofore unpaid. If the Executive
voluntarily terminates employment during the Employment Period, excluding a
termination for Good Reason, this Agreement shall terminate without further
obligations to the Executive, other than for Accrued Obligations and the timely
payment or provision of Other Benefits. In such case, all Accrued Obligations
shall be paid to the Executive in a lump sum in cash within 30 days of the Date
of Termination.
8. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor, subject to Section
13(f), shall anything herein limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice or
program of or any contract or agreement with the Company or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
9. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any setoff, counterclaim, recoupment, defense
or other claim, right or action which the Company may have against the Executive
or others. In no event shall the Executive be obligated to seek other employment
or take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this
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Agreement or any guarantee of performance thereof (including as a result of any
contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
10. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 10) (a "Payment") would be
subject to excise or other similar tax, or federal income tax above the rate
ordinarily applicable to wages and salaries paid in the ordinary course of
business, whether as a result of the provisions of Sections 280G and 4999 of the
Code, any similar or analogous provisions of any statute or regulation adopted
subsequent to the date hereof, or otherwise, or any interest or penalties are
incurred by the Executive with respect to such tax (such excise tax, other
similar tax or federal income tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 10(a), if it shall be determined that the Executive is entitled to a
Gross-Up Payment, but that the Payments do not exceed 110% of the greatest
amount (the "Reduced Amount") that could be paid to the Executive such that the
receipt of Payments would not give rise to any Excise Tax, then no Gross-Up
Payment shall be made to the Executive and the Payments, in the aggregate, shall
be reduced to the Reduced Amount.
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(b) Subject to the provisions of Section 10(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Arthur
Andersen L.L.P. or such other certified public accounting firm as may be
designated by the Executive (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within 15 business
days of the receipt of notice from the Executive that there has been a Payment,
or such earlier time as is requested by the Company. In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Change of Control, the Executive shall appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be borne
solely by the Company. Any Gross-Up Payment, as determined pursuant to this
Section 10, shall be paid by the Company to the Executive within five days of
the receipt of the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made ("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 10(c) and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which
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it gives such notice to the Company (or such shorter period ending on
the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the
Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an. attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 10(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct the Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall
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advance the amount of such payment to the Executive, on an interest-free basis
and shall indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled to settle
or contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 10(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 10(c)) promptly pay to the Company
the amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 10(c), a determination is
made that the Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
11. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior
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written consent of the Company or as may otherwise be required by law or legal
process, communicate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by it. In no event shall an
asserted violation of the provisions of this Section 10 constitute a basis for
deferring or withholding any amounts otherwise payable to the Executive under
this Agreement.
12. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
13. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, without reference
to principles of conflict of laws. The captions of this Agreement are not part
of the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
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(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Neal S. Sutton
If to the Company:
Smith International, Inc.
16740 Hardy Street
Houston, TX 77032
Fax: (281) 233-5996
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
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(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section l (a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company at any time prior to the Effective Date, in which case
the Executive shall have no further rights under this Agreement ; provided, that
this Agreement may not be terminated by the Company if it is reasonably
demonstrated by the Executive that such termination (i) was at the request of a
third party who has taken steps reasonably calculated to effect a Change of
Control or (ii) otherwise arose in connection with or anticipation of a Change
of Control. From and after the Effective Date this Agreement shall supersede any
other agreement between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ NEAL S. SUTTON
---------------------------------
NEAL S. SUTTON
SMITH INTERNATIONAL, INC.
By: /s/ DOUG ROCK
----------------------------
Doug Rock
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EXHIBIT 10.13
CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT
AGREEMENT by and between Smith International, Inc., a Delaware corporation
(the "Company") and RICHARD A. WERNER (the "Executive"), dated as of the 4th day
of January, 2000.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Other Agreements. The Company and the Executive are parties to: (i) An
Employment Agreement dated as of May 1, 1991 (the "Employment Agreement"); (ii)
an Amendment to Employment Agreement dated as of May 1, 1991 (the "Amendment")
and (ii) a First Amendment to the Amendment to the Employment Agreement dated as
of November 12, 1992 (the "First Amendment"). Upon full execution and delivery
of this Agreement, the parties agree that the Amendment and the First Amendment
shall be cancelled and of no force and effect as of January 4, 2000. The terms
of the Employment Agreement, as written, without giving effect to the Amendment
or the First Amendment, shall remain in force and effect; provided that
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in the event of a Change of Control, the terms of this Agreement shall control,
except with respect to any Accrued Obligations, as defined herein.
2. Certain Definitions. (a) The "Effective Date", shall mean the first date
during the Change of Control Period (as defined in Section 2 (b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement the "Effective Date" shall mean the date
immediately prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
3. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the
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Company (the "Outstanding Company Common Stock") or (ii) the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection (a), the
following acquisitions shall not constitute a Change of Control: (i) any
acquisition directly from the Company, (ii) any acquisition by the Company,
(iii) any acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the Company or
(iv) any acquisition by any corporation pursuant to a transaction which complies
with clauses (i), (ii) and (iii) of subsection (c) of this Section 3; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in
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substantially the same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding any
corporation resulting from such Business Combination or any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of the
then outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Business Combination and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
4. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period").
5. Terms of Employment. (a) Position and Duties. (i) During the Employment
Period, (A) the Executive's position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date and (B) the Executive's services shall be performed
at the location where the Executive was employed immediately preceding the
Effective Date or any office or location less than 35 miles from such location.
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(ii) During the Employment Period, and excluding any periods of vacation and
sick leave to which the Executive is entitled, the Executive agrees to devote
reasonable attention and time during normal business hours to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
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(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be
awarded, for each fiscal year ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash (i) under the Company's Annual Incentive Plan
based upon meeting the targets in the Annual Incentive Plan, provided that the
Executive's target bonus percentage shall be at least equal to the Executive's
target bonus percentage for the fiscal year prior to the Effective Date or equal
to an increase in the target bonus percentage given to any similarly situated
executive after the Effective Date, or, if higher, (ii) under any annual
incentive plan or discretionary award by the Company to similarly situated
executives which is enacted or approved after the Effective Date. Each such
Annual Bonus shall be paid no later than the end of the third month of the
fiscal year next following the fiscal year for which the Annual Bonus is
awarded, unless the Executive shall elect to defer the receipt of such Annual
Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment Period, the
Executive shall be entitled to participate in all incentive, savings and
retirement plans, practices, policies and programs applicable generally to other
peer executives of the Company and its affiliated companies, but in no event
shall such plans, practices, policies and programs provide the Executive with
incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, it any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities, in each
case, less favorable, in the aggregate, than the most favorable of those
provided by the Company and its affiliated companies for the Executive under
such plans, practices, policies and programs as in effect at any time during the
120-day period immediately preceding the Effective Date or if more favorable to
the Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or
the Executive's-family, as the case may be, shall be eligible for participation
in and shall receive all benefits under welfare benefit plans, practices,
policies and programs provided by the Company and its affiliated companies
(including, without limitation, medical, prescription, dental, disability,
employee life, group life, accidental death and travel accident insurance plans
and
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programs) to the extent applicable generally to other peer executives of the
Company and its affiliated companies, but in no event shall such plans,
practices, policies and programs provide the Executive with benefits which are
less favorable, in the aggregate, than the most favorable of such plans,
practices, policies and programs in effect for the Executive at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive shall be entitled to
receive prompt reimbursement for all reasonable expenses incurred by the
Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall be
entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive
shall be entitled to an office or offices of a size and with furnishings and
other appointments, and to exclusive personal secretarial and other assistance,
at least equal to the most favorable of the foregoing provided to the Executive
by the Company and its affiliated companies at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
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Executive, as provided generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be entitled
to paid vacation in accordance with the most favorable plans, policies, programs
and practices of the Company and its affiliated companies as in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
6. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 13(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. For purposes of this Agreement, "Cause" shall:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure
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<PAGE> 9
resulting from incapacity due to physical or mental illness), after a
written demand for substantial performance is delivered to the Executive by
the Board or the Chief Executive Officer of the Company which specifically
identifies the manner in which the Board or Chief Executive Officer
believes that the Executive has not substantially performed the Executive's
duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of
the Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles
and reporting requirements),
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authority, duties or responsibilities as contemplated by Section 4(a) of
this Agreement, or any other action by the Company which results in a
diminution in such position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent
action not taken in bad faith and which is remedied by the Company promptly
after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any office or
location other than as provided in Section 5(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's employment
otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section 12(c) of
this Agreement.
For purposes of this Section 6(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive. Anything in this Agreement to
the contrary notwithstanding, a termination by the Executive for any reason
during the 30-day period immediately following the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or by
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party
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hereto given in accordance with Section 13(b) of this Agreement. For purposes of
this Agreement, a "Notice of Termination" means a written notice which indicates
the specific termination provision in this Agreement relied upon, (ii) to the
extent applicable, sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated and (iii) if the Date of Termination (as defined
below) is other than the date of receipt of such notice, specifies the
termination date (which date shall be not more than thirty days after the giving
of such notice). The failure by the Executive or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of the Executive or the Company,
respectively, hereunder or preclude the Executive or the Company, respectively,
from asserting such fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the Executive's
employment is terminated by the Company for Cause, or by the Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is terminated by reason
of death or Disability, the Date of Termination shall be the date of death of
the Executive or the Disability Effective Date, as the case may be.
7. Obligations of the Company upon Termination. (a) Good Reason; Other Than
for Cause, Death or Disability. If, during the Employment Period, the Company
shall terminate the Executive's employment other than for Cause or Disability or
the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30
days after the Date of Termination the aggregate of the following amounts:
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A. the sum of (1) the Executive's Annual Base Salary through the Date
of Termination to the extent not theretofore paid, (2) the product of (x)
the higher of (I) the highest Annual Bonus paid to the Executive for the
last three full fiscal years prior to the Effective Date and (II) the
Annual Bonus paid or payable, including any bonus or portion thereof which
has been earned but deferred (and annualized for any fiscal year consisting
of less than twelve full months or during which the Executive was employed
for less than twelve full months), for the most recently completed fiscal
year during the Employment Period, if any (such higher amount being
referred to as the "Highest Annual Bonus") and (y) a fraction, the
numerator of which is the number of days in the current fiscal year through
the Date of Termination, and the denominator of which is 365 and (3) any
compensation previously deferred by the Executive (together with any
accrued interest or earnings thereon) and any accrued vacation pay, in each
case to the extent not theretofore paid (the sum of the amounts described
in clauses (1), (2), and (3) and any amounts accrued under the Employment
Agreement with the Executive not otherwise fully accrued under the terms of
this Agreement shall be hereinafter referred to as the "Accrued
Obligations"); and
B. the amount equal to the product of (1) three and (2) the sum of (x)
the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and
C. an amount equal to the excess of (a) the actuarial equivalent of
the benefit under any excess or supplemental retirement plan in which the
Executive participates (the "SERP") which the Executive would receive if
the Executive's employment continued for three years after the Date of
Termination assuming for this purpose that all accrued benefits are fully
vested, and, assuming that the Executive's compensation in each of the
three years is that required by Section 5(b)(i) and Section 5(b)(ii), over
(b) the actuarial equivalent of the Executive's actual benefit (paid or
payable), if any, under the SERP as of the Date of Termination;
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(ii) for three years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate
plan, program, practice or policy, the Company shall continue benefits
to the Executive and/or the Executive's family at least equal to those
which would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 5(b)(iv) of this
Agreement if the Executive's employment had not been terminated or, if
more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies and their families, provided, however, that
if the Executive becomes reemployed with another employer and is
eligible to receive medical or other welfare benefits under another
employer provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under such other
plan during such applicable period of eligibility. For purposes of
determining eligibility (but not the time of commencement of benefits)
of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to
have remained employed until three years after the Date of Termination
and to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which
shall be selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or
agreement of the Company and its affiliated companies (such other
amounts and benefits shall be hereinafter referred to as the "Other
Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued
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Obligations shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date of Termination.
With respect to the provision of Other Benefits, the term Other Benefits as
utilized in this Section 7(b) shall include, without limitation, and the
Executive's estate and/or beneficiaries shall be entitled to receive, benefits
at least equal to the most favorable benefits provided by the Company and
affiliated companies to the estates and beneficiaries of peer executives of the
Company and such affiliated companies under such plans, programs, practices and
policies relating to death benefits, if any, as in effect with respect to other
peer executives and their beneficiaries at any time during the 120-day period
immediately preceding the Effective Date or, if more-favorable to the
Executive's estate and/or the Executive's beneficiaries, as in effect on the
date of the Executive's death with respect to other peer executives of the
Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 7(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the Executive's family, as in effect at any
time thereafter generally with respect to other peer executives of the Company
and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive's employment shall
be terminated for Cause during the Employment Period, this Agreement shall
terminate without
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further obligations to the Executive other than the obligation to pay to the
Executive (x) his Annual Base Salary through the Date of Termination, (y) the
amount of any compensation previously deferred by the Executive, and (z) Other
Benefits, in each case to the extent theretofore unpaid. If the Executive
voluntarily terminates employment during the Employment Period, excluding a
termination for Good Reason, this Agreement shall terminate without further
obligations to the Executive, other than for Accrued Obligations and the timely
payment or provision of Other Benefits. In such case, all Accrued Obligations
shall be paid to the Executive in a lump sum in cash within 30 days of the Date
of Termination.
8. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 13(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
9. Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any setoff, counterclaim, recoupment, defense or other claim,
right or action which the Company may have against the Executive or others. In
no event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Agreement and such amounts shall not be reduced
whether or not the Executive obtains other employment. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal fees and expenses
which the Executive may reasonably incur as a result of any contest (regardless
of the outcome thereof) by the Company, the Executive or others of the validity
or enforceability of, or liability under, any provision of this
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Agreement or any guarantee of performance thereof (including as a result of any
contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
10. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and except
as set forth below, in the event it shall be determined that any payment or
distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 10) (a "Payment") would be
subject to excise or other similar tax, or federal income tax above the rate
ordinarily applicable to wages and salaries paid in the ordinary course of
business, whether as a result of the provisions of Sections 280G and 4999 of the
Code, any similar or analogous provisions of any statute or regulation adopted
subsequent to the date hereof, or otherwise, or any interest or penalties are
incurred by the Executive with respect to such tax (such excise tax, other
similar tax or federal income tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 10(a), if it shall be determined that the Executive is entitled to a
Gross-Up Payment, but that the Payments do not exceed 110% of the greatest
amount (the "Reduced Amount") that could be paid to the Executive such that the
receipt of Payments would not give rise to any Excise Tax, then no Gross-Up
Payment shall be made to the Executive and the Payments, in the aggregate, shall
be reduced to the Reduced Amount.
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(b) Subject to the provisions of Section 10(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by Arthur Andersen
L.L.P. or such other certified public accounting firm as may be designated by
the Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 10, shall be paid
by the Company to the Executive within five days of the receipt of the
Accounting Firm's determination. Any determination by the Accounting Firm shall
be binding upon the Company and the Executive. As a result of the uncertainty in
the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made
("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 10(c) and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of the nature of such
claim and the date on which such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of the 30-day period following
the date on which
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it gives such notice to the Company (or such shorter period ending on the date
that any payment of taxes with respect to such claim is due). If the Company
notifies the Executive in writing prior to the expiration of such period that it
desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the Company
relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an. attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such
claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 10(c), the Company shall control all proceedings taken in
connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option, either
direct the Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall
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advance the amount of such payment to the Executive, on an interest-free basis
and shall indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable year of
the Executive with respect to which such contested amount is claimed to be due
is limited solely to such contested amount. Furthermore, the Company's control
of the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled to settle
or contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 10(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 10(c)) promptly pay to the Company
the amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 10(c), a determination is
made that the Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
11. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior
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written consent of the Company or as may otherwise be required by law or legal
process, communicate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by it. In no event shall an
asserted violation of the provisions of this Section 10 constitute a basis for
deferring or withholding any amounts otherwise payable to the Executive under
this Agreement.
12. Successors. (a) This Agreement is personal to the Executive and without
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
13. Miscellaneous. (a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without reference to principles
of conflict of laws. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This Agreement may not be
amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
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(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
<TABLE>
<S> <C> <C>
If to the Executive:
Richard A. Werner
If to the Company:
Smith International, Inc.
16740 Hardy Street
Houston, TX 77032
Fax: (281) 233-5996
Attention: General Counsel
</TABLE>
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
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(f) The Executive and the Company acknowledge that, except as may otherwise
be provided under any other written agreement between the Executive and the
Company, the employment of the Executive by the Company is "at will" and,
subject to Section l (a) hereof, prior to the Effective Date, the Executive's
employment and/or this Agreement may be terminated by either the Executive or
the Company at any time prior to the Effective Date, in which case the Executive
shall have no further rights under this Agreement ; provided, that this
Agreement may not be terminated by the Company if it is reasonably demonstrated
by the Executive that such termination (i) was at the request of a third party
who has taken steps reasonably calculated to effect a Change of Control or (ii)
otherwise arose in connection with or anticipation of a Change of Control. From
and after the Effective Date this Agreement shall supersede any other agreement
between the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ RICHARD A. WERNER
--------------------------------------------
RICHARD A. WERNER
SMITH INTERNATIONAL, INC.
By: /s/ DOUG ROCK
-----------------------------------------
Doug Rock
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EXHIBIT 10.14
CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT
AGREEMENT by and between Smith International, Inc., a Delaware corporation
(the "Company") and LOREN K. CARROLL (the "Executive"), dated as of the 4th day
of January, 2000.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date", shall mean the first date
during the Change of Control Period (as defined in Section l (b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement
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the "Effective Date" shall mean the date immediately prior to the date of such
termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or
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nomination for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board shall
be considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
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(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties. (i) During the Employment
Period, (A) the Executive's position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date and (B) the Executive's services shall be performed
at the location where the Executive was employed immediately preceding the
Effective Date or any office or location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
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<PAGE> 5
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall
be awarded, for each fiscal year ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash (i) under the Company's Annual Incentive Plan
based upon meeting the targets in the Annual Incentive Plan, provided that the
Executive's target bonus percentage shall be at least equal to the Executive's
target bonus percentage for the fiscal year prior to the Effective Date or equal
to an increase in the target bonus percentage given to any similarly situated
executive after the Effective Date, or, if higher, (ii) under any annual
incentive plan or discretionary award by the Company to similarly situated
executives which is enacted or approved after the Effective Date. Each such
Annual Bonus shall be paid no later than the end of the third month of the
fiscal year next following the fiscal year for which the Annual Bonus is
awarded, unless the Executive shall elect to defer the receipt of such Annual
Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide
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<PAGE> 6
the Executive with incentive opportunities (measured with respect to both
regular and special incentive opportunities, to the extent, it any, that such
distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at any
time during the 120-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's-family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive shall be entitled
to receive prompt reimbursement for all reasonable expenses incurred by the
Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
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(vi) Fringe Benefits. During the Employment Period, the Executive shall be
entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive
shall be entitled to an office or offices of a size and with furnishings and
other appointments, and to exclusive personal secretarial and other assistance,
at least equal to the most favorable of the foregoing provided to the Executive
by the Company and its affiliated companies at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as provided generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the
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<PAGE> 8
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the manner
in which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of
the Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a
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<PAGE> 9
resolution duly adopted by the affirmative vote of not less than three-quarters
of the entire membership of the Board at a meeting of the Board called and held
for such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 4(a) of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties
or responsibilities, excluding for this purpose an isolated, insubstantial
and inadvertent action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any office or
location other than as provided in Section 4(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's employment
otherwise than as expressly permitted by this Agreement; or
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<PAGE> 10
(v) any failure by the Company to comply with and satisfy Section 11(c) of
this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive. Anything in this Agreement to
the contrary notwithstanding, a termination by the Executive for any reason
during the 30-day period immediately following the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or by
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the Executive's
employment is terminated by the Company for Cause, or by the Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is terminated by reason
of
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death or Disability, the Date of Termination shall be the date of death of the
Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other Than
for Cause, Death or Disability. If, during the Employment Period, the Company
shall terminate the Executive's employment other than for Cause or Disability or
the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30
days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base Salary through the Date
of Termination to the extent not theretofore paid, (2) the product of (x)
the higher of (I) the highest Annual Bonus paid to the Executive for the
last three full fiscal years prior to the Effective Date and (II) the
Annual Bonus paid or payable, including any bonus or portion thereof which
has been earned but deferred (and annualized for any fiscal year consisting
of less than twelve full months or during which the Executive was employed
for less than twelve full months), for the most recently completed fiscal
year during the Employment Period, if any (such higher amount being
referred to as the "Highest Annual Bonus") and (y) a fraction, the
numerator of which is the number of days in the current fiscal year through
the Date of Termination, and the denominator of which is 365 and (3) any
compensation previously deferred by the Executive (together with any
accrued interest or earnings thereon) and any accrued vacation pay, in each
case to the extent not theretofore paid (the sum of the amounts described
in clauses (1), (2), and (3) shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the sum of (x)
the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and
C. an amount equal to the excess of (a) the actuarial equivalent of
the benefit under any excess or supplemental retirement plan in which the
Executive participates (the
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"SERP") which the Executive would receive if the Executive's employment
continued for three years after the Date of Termination assuming for this
purpose that all accrued benefits are fully vested, and, assuming that the
Executive's compensation in each of the three years is that required by
Section 4(b)(i) and Section 4(b)(ii), over (b) the actuarial equivalent of
the Executive's actual benefit (paid or payable), if any, under the SERP as
of the Date of Termination;
(ii) for three years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate
plan, program, practice or policy, the Company shall continue benefits
to the Executive and/or the Executive's family at least equal to those
which would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 4(b)(iv) of this
Agreement if the Executive's employment had not been terminated or, if
more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies and their families, provided, however, that
if the Executive becomes reemployed with another employer and is
eligible to receive medical or other welfare benefits under another
employer provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under such other
plan during such applicable period of eligibility. For purposes of
determining eligibility (but not the time of commencement of benefits)
of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to
have remained employed until three years after the Date of Termination
and to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which
shall be selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or
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contract or agreement of the Company and its affiliated companies
(such other amounts and benefits shall be hereinafter referred to as
the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more-favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the
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Executive's family, as in effect at any time thereafter generally with respect
to other peer executives of the Company and its affiliated companies and their
families.
(d) Cause; Other than for Good Reason. If the Executive's employment shall
be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any setoff, counterclaim, recoupment, defense or other claim,
right or action which the Company may have against the Executive or others. In
no event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Agreement and such amounts shall not be reduced
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whether or not the Executive obtains other employment. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal fees and expenses
which the Executive may reasonably incur as a result of any contest (regardless
of the outcome thereof) by the Company, the Executive or others of the validity
or enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as
amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and except
as set forth below, in the event it shall be determined that any payment or
distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would be
subject to excise or other similar tax, or federal income tax above the rate
ordinarily applicable to wages and salaries paid in the ordinary course of
business, whether as a result of the provisions of Sections 280G and 4999 of the
Code, any similar or analogous provisions of any statute or regulation adopted
subsequent to the date hereof, or otherwise, or any interest or penalties are
incurred by the Executive with respect to such tax (such excise tax, other
similar tax or federal income tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 9(a), if it shall be determined that the Executive is entitled to a
Gross-Up Payment, but that the Payments do not exceed 110% of the greatest
amount (the "Reduced Amount") that could be paid to the Executive such that the
receipt of Payments would
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not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the
Executive and the Payments, in the aggregate, shall be reduced to the Reduced
Amount.
(b) Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by Arthur Andersen
L.L.P. or such other certified public accounting firm as may be designated by
the Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 9(c) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of
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the nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which it gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Executive in writing
prior to the expiration of such period that it desires to contest such claim,
the Executive shall:
(i) give the Company any information reasonably requested by the Company
relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an. attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such
claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the
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Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without
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the prior written consent of the Company or as may otherwise be required by law
or legal process, communicate or divulge any such information, knowledge or data
to anyone other than the Company and those designated by it. In no event shall
an asserted violation of the provisions of this Section 10 constitute a basis
for deferring or withholding any amounts otherwise payable to the Executive
under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and without
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without reference to principles
of conflict of laws. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This Agreement may not be
amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
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If to the Executive:
Loren K. Carroll
If to the Company:
Smith International, Inc.
16740 Hardy Street
Houston, TX 77032
Fax: (281) 233-5996
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise
be provided under any other written agreement between the Executive and the
Company, the
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employment of the Executive by the Company is "at will" and, subject to Section
l (a) hereof, prior to the Effective Date, the Executive's employment and/or
this Agreement may be terminated by either the Executive or the Company at any
time prior to the Effective Date, in which case the Executive shall have no
further rights under this Agreement; provided, that this Agreement may not be
terminated by the Company if it is reasonably demonstrated by the Executive that
such termination (i) was at the request of a third party who has taken steps
reasonably calculated to effect a Change of Control or (ii) otherwise arose in
connection with or anticipation of a Change of Control. From and after the
Effective Date this Agreement shall supersede any other agreement between the
parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ LOREN K. CARROLL
----------------------------------------
LOREN K. CARROLL
SMITH INTERNATIONAL, INC.
By: /s/ DOUG ROCK
-------------------------------------
Doug Rock
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EXHIBIT 10.15
CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT
AGREEMENT by and between Smith International, Inc., a Delaware
corporation (the "Company") and MARGARET K. DORMAN (the "Executive"), dated as
of the 4th day of January, 2000.
The Board of Directors of the Company (the "Board"), has determined
that it is in the best interests of the Company and its shareholders to assure
that the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company. The Board believes it is imperative to diminish
the inevitable distraction of the Executive by virtue of the personal
uncertainties and risks created by a pending or threatened Change of Control and
to encourage the Executive's full attention and dedication to the Company
currently and in the event of any threatened or pending Change of Control, and
to provide the Executive with compensation and benefits arrangements upon a
Change of Control which ensure that the compensation and benefits expectations
of the Executive will be satisfied and which are competitive with those of other
corporations. Therefore, in order to accomplish these objectives, the Board has
caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date", shall mean the first
date during the Change of Control Period (as defined in Section l (b)) on which
a Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement
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the "Effective Date" shall mean the date immediately prior to the date of such
termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on
the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the date one year after the date hereof,
and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall be
automatically extended so as to terminate three years from such Renewal Date,
unless at least 60 days prior to the Renewal Date the Company shall give notice
to the Executive that the Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or
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nomination for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board shall
be considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
(c) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
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(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the employ
of the Company subject to the terms and conditions of this Agreement, for the
period commencing on the Effective Date and ending on the third anniversary of
such date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, (A) the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 120-day period
immediately preceding the Effective Date and (B) the Executive's services shall
be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
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(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive
shall be awarded, for each fiscal year ending during the Employment Period, an
annual bonus (the "Annual Bonus") in cash (i) under the Company's Annual
Incentive Plan based upon meeting the targets in the Annual Incentive Plan,
provided that the Executive's target bonus percentage shall be at least equal to
the Executive's target bonus percentage for the fiscal year prior to the
Effective Date or equal to an increase in the target bonus percentage given to
any similarly situated executive after the Effective Date, or, if higher, (ii)
under any annual incentive plan or discretionary award by the Company to
similarly situated executives which is enacted or approved after the Effective
Date. Each such Annual Bonus shall be paid no later than the end of the third
month of the fiscal year next following the fiscal year for which the Annual
Bonus is awarded, unless the Executive shall elect to defer the receipt of such
Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide
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the Executive with incentive opportunities (measured with respect to both
regular and special incentive opportunities, to the extent, it any, that such
distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at any
time during the 120-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's-family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
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(vi) Fringe Benefits. During the Employment Period, the Executive shall
be entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as provided generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the
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Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the
manner in which the Board or Chief Executive Officer believes that the
Executive has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the part
of the Executive, shall be considered "willful" unless it is done, or omitted to
be done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a
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resolution duly adopted by the affirmative vote of not less than three-quarters
of the entire membership of the Board at a meeting of the Board called and held
for such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this Agreement, or
any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given
by the Executive;
(iii) the Company's requiring the Executive to be based at any office
or location other than as provided in Section 4(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
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(v) any failure by the Company to comply with and satisfy Section 11(c)
of this Agreement.
For purposes of this Section 5(c), any good faith determination of
"Good Reason" made by the Executive shall be conclusive. Anything in this
Agreement to the contrary notwithstanding, a termination by the Executive for
any reason during the 30-day period immediately following the first anniversary
of the Effective Date shall be deemed to be a termination for Good Reason for
all purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 12(b) of this
Agreement. For purposes of this Agreement, a "Notice of Termination" means a
written notice which indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than thirty
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of
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death or Disability, the Date of Termination shall be the date of death of the
Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other
Than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within
30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the higher of (I) the highest Annual Bonus paid to the
Executive for the last three full fiscal years prior to the Effective
Date and (II) the Annual Bonus paid or payable, including any bonus or
portion thereof which has been earned but deferred (and annualized for
any fiscal year consisting of less than twelve full months or during
which the Executive was employed for less than twelve full months), for
the most recently completed fiscal year during the Employment Period,
if any (such higher amount being referred to as the "Highest Annual
Bonus") and (y) a fraction, the numerator of which is the number of
days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (3) any compensation previously
deferred by the Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in
clauses (1), (2), and (3) shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest
Annual Bonus; and
C. an amount equal to the excess of (a) the actuarial
equivalent of the benefit under any excess or supplemental retirement
plan in which the Executive participates (the
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"SERP") which the Executive would receive if the Executive's employment
continued for three years after the Date of Termination assuming for
this purpose that all accrued benefits are fully vested, and, assuming
that the Executive's compensation in each of the three years is that
required by Section 4(b)(i) and Section 4(b)(ii), over (b) the
actuarial equivalent of the Executive's actual benefit (paid or
payable), if any, under the SERP as of the Date of Termination;
(ii) for three years after the Executive's Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which
would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 4(b)(iv) of this
Agreement if the Executive's employment had not been terminated or, if
more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is eligible to
receive medical or other welfare benefits under another employer
provided plan, the medical and other welfare benefits described herein
shall be secondary to those provided under such other plan during such
applicable period of eligibility. For purposes of determining
eligibility (but not the time of commencement of benefits) of the
Executive for retiree benefits pursuant to such plans, practices,
programs and policies, the Executive shall be considered to have
remained employed until three years after the Date of Termination and
to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which
shall be selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or
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contract or agreement of the Company and its affiliated companies (such
other amounts and benefits shall be hereinafter referred to as the
"Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more-favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the
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Executive's family, as in effect at any time thereafter generally with respect
to other peer executives of the Company and its affiliated companies and their
families.
(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor, subject to Section
12(f), shall anything herein limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice or
program of or any contract or agreement with the Company or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any setoff, counterclaim, recoupment, defense
or other claim, right or action which the Company may have against the Executive
or others. In no event shall the Executive be obligated to seek other employment
or take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced
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whether or not the Executive obtains other employment. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal fees and expenses
which the Executive may reasonably incur as a result of any contest (regardless
of the outcome thereof) by the Company, the Executive or others of the validity
or enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as
amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would be
subject to excise or other similar tax, or federal income tax above the rate
ordinarily applicable to wages and salaries paid in the ordinary course of
business, whether as a result of the provisions of Sections 280G and 4999 of the
Code, any similar or analogous provisions of any statute or regulation adopted
subsequent to the date hereof, or otherwise, or any interest or penalties are
incurred by the Executive with respect to such tax (such excise tax, other
similar tax or federal income tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 9(a), if it shall be determined that the Executive is entitled to a
Gross-Up Payment, but that the Payments do not exceed 110% of the greatest
amount (the "Reduced Amount") that could be paid to the Executive such that the
receipt of Payments would
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not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the
Executive and the Payments, in the aggregate, shall be reduced to the Reduced
Amount.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Arthur
Andersen L.L.P. or such other certified public accounting firm as may be
designated by the Executive (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within 15 business
days of the receipt of notice from the Executive that there has been a Payment,
or such earlier time as is requested by the Company. In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Change of Control, the Executive shall appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be borne
solely by the Company. Any Gross-Up Payment, as determined pursuant to this
Section 9, shall be paid by the Company to the Executive within five days of the
receipt of the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made ("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 9(c) and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of
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the nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which it gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Executive in writing
prior to the expiration of such period that it desires to contest such claim,
the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an. attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the
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Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without
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the prior written consent of the Company or as may otherwise be required by law
or legal process, communicate or divulge any such information, knowledge or data
to anyone other than the Company and those designated by it. In no event shall
an asserted violation of the provisions of this Section 10 constitute a basis
for deferring or withholding any amounts otherwise payable to the Executive
under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, without reference
to principles of conflict of laws. The captions of this Agreement are not part
of the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
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If to the Executive:
Margaret K. Dorman
If to the Company:
Smith International, Inc.
16740 Hardy Street
Houston, TX 77032
Fax: (281) 233-5996
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section l (a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company at any time prior to the Effective Date, in
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which case the Executive shall have no further rights under this Agreement ;
provided, that this Agreement may not be terminated by the Company if it is
reasonably demonstrated by the Executive that such termination (i) was at the
request of a third party who has taken steps reasonably calculated to effect a
Change of Control or (ii) otherwise arose in connection with or anticipation of
a Change of Control. From and after the Effective Date this Agreement shall
supersede any other agreement between the parties with respect to the subject
matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ MARGARET K. DORMAN
-----------------------------------------
MARGARET K. DORMAN
SMITH INTERNATIONAL, INC.
By: /s/ DOUG ROCK
-------------------------------------
Doug Rock
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EXHIBIT 10.16
CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT
AGREEMENT by and between Smith International, Inc., a Delaware
corporation (the "Company") and JOHN J. KENNEDY (the "Executive"), dated as of
the 4th day of January, 2000.
The Board of Directors of the Company (the "Board"), has determined
that it is in the best interests of the Company and its shareholders to assure
that the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company. The Board believes it is imperative to diminish
the inevitable distraction of the Executive by virtue of the personal
uncertainties and risks created by a pending or threatened Change of Control and
to encourage the Executive's full attention and dedication to the Company
currently and in the event of any threatened or pending Change of Control, and
to provide the Executive with compensation and benefits arrangements upon a
Change of Control which ensure that the compensation and benefits expectations
of the Executive will be satisfied and which are competitive with those of other
corporations. Therefore, in order to accomplish these objectives, the Board has
caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date", shall mean the first
date during the Change of Control Period (as defined in Section l(b)) on which
a Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement
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the "Effective Date" shall mean the date immediately prior to the date of such
termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on
the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the date one year after the date hereof,
and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall be
automatically extended so as to terminate three years from such Renewal Date,
unless at least 60 days prior to the Renewal Date the Company shall give notice
to the Executive that the Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or
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nomination for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board shall
be considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
(c) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
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(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the employ
of the Company subject to the terms and conditions of this Agreement, for the
period commencing on the Effective Date and ending on the third anniversary of
such date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties. (i) During the
Employment Period, (A) the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and responsibilities shall
be at least commensurate in all material respects with the most significant of
those held, exercised and assigned at any time during the 120-day period
immediately preceding the Effective Date and (B) the Executive's services shall
be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
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(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive
shall be awarded, for each fiscal year ending during the Employment Period, an
annual bonus (the "Annual Bonus") in cash (i) under the Company's Annual
Incentive Plan based upon meeting the targets in the Annual Incentive Plan,
provided that the Executive's target bonus percentage shall be at least equal to
the Executive's target bonus percentage for the fiscal year prior to the
Effective Date or equal to an increase in the target bonus percentage given to
any similarly situated executive after the Effective Date, or, if higher, (ii)
under any annual incentive plan or discretionary award by the Company to
similarly situated executives which is enacted or approved after the Effective
Date. Each such Annual Bonus shall be paid no later than the end of the third
month of the fiscal year next following the fiscal year for which the Annual
Bonus is awarded, unless the Executive shall elect to defer the receipt of such
Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide
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the Executive with incentive opportunities (measured with respect to both
regular and special incentive opportunities, to the extent, it any, that such
distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at any
time during the 120-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's-family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
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(vi) Fringe Benefits. During the Employment Period, the Executive shall
be entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as provided generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the
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Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the
manner in which the Board or Chief Executive Officer believes that the
Executive has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the part
of the Executive, shall be considered "willful" unless it is done, or omitted to
be done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a
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resolution duly adopted by the affirmative vote of not less than three-quarters
of the entire membership of the Board at a meeting of the Board called and held
for such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this Agreement, or
any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given
by the Executive;
(iii) the Company's requiring the Executive to be based at any office
or location other than as provided in Section 4(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
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(v) any failure by the Company to comply with and satisfy Section 11(c)
of this Agreement.
For purposes of this Section 5(c), any good faith determination of
"Good Reason" made by the Executive shall be conclusive. Anything in this
Agreement to the contrary notwithstanding, a termination by the Executive for
any reason during the 30-day period immediately following the first anniversary
of the Effective Date shall be deemed to be a termination for Good Reason for
all purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or
by the Executive for Good Reason, shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 12(b) of this
Agreement. For purposes of this Agreement, a "Notice of Termination" means a
written notice which indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than thirty
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of
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death or Disability, the Date of Termination shall be the date of death of the
Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other
Than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within
30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the higher of (I) the highest Annual Bonus paid to the
Executive for the last three full fiscal years prior to the Effective
Date and (II) the Annual Bonus paid or payable, including any bonus or
portion thereof which has been earned but deferred (and annualized for
any fiscal year consisting of less than twelve full months or during
which the Executive was employed for less than twelve full months), for
the most recently completed fiscal year during the Employment Period,
if any (such higher amount being referred to as the "Highest Annual
Bonus") and (y) a fraction, the numerator of which is the number of
days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (3) any compensation previously
deferred by the Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in
clauses (1), (2), and (3) shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest
Annual Bonus; and
C. an amount equal to the excess of (a) the actuarial
equivalent of the benefit under any excess or supplemental retirement
plan in which the Executive participates (the
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"SERP") which the Executive would receive if the Executive's employment
continued for three years after the Date of Termination assuming for
this purpose that all accrued benefits are fully vested, and, assuming
that the Executive's compensation in each of the three years is that
required by Section 4(b)(i) and Section 4(b)(ii), over (b) the
actuarial equivalent of the Executive's actual benefit (paid or
payable), if any, under the SERP as of the Date of Termination;
(ii) for three years after the Executive's Date of Termination, or such
longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which
would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 4(b)(iv) of this
Agreement if the Executive's employment had not been terminated or, if
more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is eligible to
receive medical or other welfare benefits under another employer
provided plan, the medical and other welfare benefits described herein
shall be secondary to those provided under such other plan during such
applicable period of eligibility. For purposes of determining
eligibility (but not the time of commencement of benefits) of the
Executive for retiree benefits pursuant to such plans, practices,
programs and policies, the Executive shall be considered to have
remained employed until three years after the Date of Termination and
to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which
shall be selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or
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contract or agreement of the Company and its affiliated companies (such
other amounts and benefits shall be hereinafter referred to as the
"Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more-favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the
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Executive's family, as in effect at any time thereafter generally with respect
to other peer executives of the Company and its affiliated companies and their
families.
(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies and for which the Executive may qualify, nor, subject to Section
12(f), shall anything herein limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice or
program of or any contract or agreement with the Company or any of its
affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any setoff, counterclaim, recoupment, defense
or other claim, right or action which the Company may have against the Executive
or others. In no event shall the Executive be obligated to seek other employment
or take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced
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whether or not the Executive obtains other employment. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal fees and expenses
which the Executive may reasonably incur as a result of any contest (regardless
of the outcome thereof) by the Company, the Executive or others of the validity
or enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as
amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would be
subject to excise or other similar tax, or federal income tax above the rate
ordinarily applicable to wages and salaries paid in the ordinary course of
business, whether as a result of the provisions of Sections 280G and 4999 of the
Code, any similar or analogous provisions of any statute or regulation adopted
subsequent to the date hereof, or otherwise, or any interest or penalties are
incurred by the Executive with respect to such tax (such excise tax, other
similar tax or federal income tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 9(a), if it shall be determined that the Executive is entitled to a
Gross-Up Payment, but that the Payments do not exceed 110% of the greatest
amount (the "Reduced Amount") that could be paid to the Executive such that the
receipt of Payments would
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not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the
Executive and the Payments, in the aggregate, shall be reduced to the Reduced
Amount.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Arthur
Andersen L.L.P. or such other certified public accounting firm as may be
designated by the Executive (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within 15 business
days of the receipt of notice from the Executive that there has been a Payment,
or such earlier time as is requested by the Company. In the event that the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting the Change of Control, the Executive shall appoint another
nationally recognized accounting firm to make the determinations required
hereunder (which accounting firm shall then be referred to as the Accounting
Firm hereunder). All fees and expenses of the Accounting Firm shall be borne
solely by the Company. Any Gross-Up Payment, as determined pursuant to this
Section 9, shall be paid by the Company to the Executive within five days of the
receipt of the Accounting Firm's determination. Any determination by the
Accounting Firm shall be binding upon the Company and the Executive. As a result
of the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by the Company should have been
made ("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that the Company exhausts its remedies pursuant to
Section 9(c) and the Executive thereafter is required to make a payment of any
Excise Tax, the Accounting Firm shall determine the amount of the Underpayment
that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of
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the nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which it gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Executive in writing
prior to the expiration of such period that it desires to contest such claim,
the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an. attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the
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Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without
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the prior written consent of the Company or as may otherwise be required by law
or legal process, communicate or divulge any such information, knowledge or data
to anyone other than the Company and those designated by it. In no event shall
an asserted violation of the provisions of this Section 10 constitute a basis
for deferring or withholding any amounts otherwise payable to the Executive
under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, without reference
to principles of conflict of laws. The captions of this Agreement are not part
of the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
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If to the Executive:
John J. Kennedy
If to the Company:
Smith International, Inc.
16740 Hardy Street
Houston, TX 77032
Fax: (281) 233-5996
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the
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employment of the Executive by the Company is "at will" and, subject to Section
1(a) hereof, prior to the Effective Date, the Executive's employment and/or
this Agreement may be terminated by either the Executive or the Company at any
time prior to the Effective Date, in which case the Executive shall have no
further rights under this Agreement; provided, that this Agreement may not be
terminated by the Company if it is reasonably demonstrated by the Executive that
such termination (i) was at the request of a third party who has taken steps
reasonably calculated to effect a Change of Control or (ii) otherwise arose in
connection with or anticipation of a Change of Control. From and after the
Effective Date this Agreement shall supersede any other agreement between the
parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ JOHN J. KENNEDY
-----------------------------
JOHN J. KENNEDY
SMITH INTERNATIONAL, INC.
By: /s/ DOUG ROCK
--------------------------
Doug Rock
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EXHIBIT 10.17
CHANGE-OF-CONTROL EMPLOYMENT AGREEMENT
AGREEMENT by and between Smith International, Inc., a Delaware corporation
(the "Company") and ROGER A. BROWN (the "Executive"), dated as of the 4th day of
January, 2000.
The Board of Directors of the Company (the "Board"), has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication of the Executive, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined below) of
the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions. (a) The "Effective Date", shall mean the first date
during the Change of Control Period (as defined in Section l (b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated prior to the date on which
the Change of Control occurs, and if it is reasonably demonstrated by the
Executive that such termination of employment (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control or
(ii) otherwise arose in connection with or anticipation of a Change of Control,
then for all purposes of this Agreement
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the "Effective Date" shall mean the date immediately prior to the date of such
termination of employment.
(b) The "Change of Control Period" shall mean the period commencing on the
date hereof and ending on the third anniversary of the date hereof; provided,
however, that commencing on the date one year after the date hereof, and on each
annual anniversary of such date (such date and each annual anniversary thereof
shall be hereinafter referred to as the "Renewal Date"), unless previously
terminated, the Change of Control Period shall be automatically extended so as
to terminate three years from such Renewal Date, unless at least 60 days prior
to the Renewal Date the Company shall give notice to the Executive that the
Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or
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nomination for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board shall
be considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company (a
"Business Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
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(d) Approval by the shareholders of the Company of a complete liquidation
or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period").
4. Terms of Employment. (a) Position and Duties. (i) During the Employment
Period, (A) the Executive's position (including status, offices, titles and
reporting requirements), authority, duties and responsibilities shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned at any time during the 120-day period immediately
preceding the Effective Date and (B) the Executive's services shall be performed
at the location where the Executive was employed immediately preceding the
Effective Date or any office or location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of vacation
and sick leave to which the Executive is entitled, the Executive agrees to
devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
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(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually. Any increase in Annual Base Salary shall not serve to limit or
reduce any other obligation to the Executive under this Agreement. Annual Base
Salary shall not be reduced after any such increase and the term Annual Base
Salary as utilized in this Agreement shall refer to Annual Base Salary as so
increased. As used in this Agreement, the term "affiliated companies" shall
include any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall
be awarded, for each fiscal year ending during the Employment Period, an annual
bonus (the "Annual Bonus") in cash (i) under the Company's Annual Incentive Plan
based upon meeting the targets in the Annual Incentive Plan, provided that the
Executive's target bonus percentage shall be at least equal to the Executive's
target bonus percentage for the fiscal year prior to the Effective Date or equal
to an increase in the target bonus percentage given to any similarly situated
executive after the Effective Date, or, if higher, (ii) under any annual
incentive plan or discretionary award by the Company to similarly situated
executives which is enacted or approved after the Effective Date. Each such
Annual Bonus shall be paid no later than the end of the third month of the
fiscal year next following the fiscal year for which the Annual Bonus is
awarded, unless the Executive shall elect to defer the receipt of such Annual
Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable generally to
other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide
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the Executive with incentive opportunities (measured with respect to both
regular and special incentive opportunities, to the extent, it any, that such
distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at any
time during the 120-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive
and/or the Executive's-family, as the case may be, shall be eligible for
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) to the extent applicable generally to other peer
executives of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(v) Expenses. During the Employment Period, the Executive shall be entitled
to receive prompt reimbursement for all reasonable expenses incurred by the
Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
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(vi) Fringe Benefits. During the Employment Period, the Executive shall be
entitled to fringe benefits, including, without limitation, tax and financial
planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive
shall be entitled to an office or offices of a size and with furnishings and
other appointments, and to exclusive personal secretarial and other assistance,
at least equal to the most favorable of the foregoing provided to the Executive
by the Company and its affiliated companies at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to the
Executive, as provided generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans, policies,
programs and practices of the Company and its affiliated companies as in effect
for the Executive at any time during the 120-day period immediately preceding
the Effective Date or, if more favorable to the Executive, as in effect
generally at any time thereafter with respect to other peer executives of the
Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the
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Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment during the
Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the manner
in which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of
the Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a
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resolution duly adopted by the affirmative vote of not less than three-quarters
of the entire membership of the Board at a meeting of the Board called and held
for such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 4(a) of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties
or responsibilities, excluding for this purpose an isolated, insubstantial
and inadvertent action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the provisions of
Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any office or
location other than as provided in Section 4(a)(i)(B) hereof or the
Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's employment
otherwise than as expressly permitted by this Agreement; or
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(v) any failure by the Company to comply with and satisfy Section 11(c) of
this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good
Reason" made by the Executive shall be conclusive. Anything in this Agreement to
the contrary notwithstanding, a termination by the Executive for any reason
during the 30-day period immediately following the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause, or by
the Executive for Good Reason, shall be communicated by Notice of Termination to
the other party hereto given in accordance with Section 12(b) of this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstance in enforcing the
Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the Executive's
employment is terminated by the Company for Cause, or by the Executive for Good
Reason, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be, (ii) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination and (iii) if the Executive's employment is terminated by reason
of
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death or Disability, the Date of Termination shall be the date of death of the
Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other Than
for Cause, Death or Disability. If, during the Employment Period, the Company
shall terminate the Executive's employment other than for Cause or Disability or
the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30
days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executive's Annual Base Salary through the Date
of Termination to the extent not theretofore paid, (2) the product of (x)
the higher of (I) the highest Annual Bonus paid to the Executive for the
last three full fiscal years prior to the Effective Date and (II) the
Annual Bonus paid or payable, including any bonus or portion thereof which
has been earned but deferred (and annualized for any fiscal year consisting
of less than twelve full months or during which the Executive was employed
for less than twelve full months), for the most recently completed fiscal
year during the Employment Period, if any (such higher amount being
referred to as the "Highest Annual Bonus") and (y) a fraction, the
numerator of which is the number of days in the current fiscal year through
the Date of Termination, and the denominator of which is 365 and (3) any
compensation previously deferred by the Executive (together with any
accrued interest or earnings thereon) and any accrued vacation pay, in each
case to the extent not theretofore paid (the sum of the amounts described
in clauses (1), (2), and (3) shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the sum of (x)
the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and
C. an amount equal to the excess of (a) the actuarial equivalent of
the benefit under any excess or supplemental retirement plan in which the
Executive participates (the
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"SERP") which the Executive would receive if the Executive's employment
continued for three years after the Date of Termination assuming for this
purpose that all accrued benefits are fully vested, and, assuming that the
Executive's compensation in each of the three years is that required by
Section 4(b)(i) and Section 4(b)(ii), over (b) the actuarial equivalent of
the Executive's actual benefit (paid or payable), if any, under the SERP as
of the Date of Termination;
(ii) for three years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate
plan, program, practice or policy, the Company shall continue benefits
to the Executive and/or the Executive's family at least equal to those
which would have been provided to them in accordance with the plans,
programs, practices and policies described in Section 4(b)(iv) of this
Agreement if the Executive's employment had not been terminated or, if
more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and
its affiliated companies and their families, provided, however, that
if the Executive becomes reemployed with another employer and is
eligible to receive medical or other welfare benefits under another
employer provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under such other
plan during such applicable period of eligibility. For purposes of
determining eligibility (but not the time of commencement of benefits)
of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to
have remained employed until three years after the Date of Termination
and to have retired on the last day of such period;
(iii) the Company shall, at its sole expense as incurred, provide the
Executive with outplacement services the scope and provider of which
shall be selected by the Executive in his sole discretion; and
(iv) to the extent not theretofore paid or provided, the Company shall
timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or
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contract or agreement of the Company and its affiliated companies
(such other amounts and benefits shall be hereinafter referred to as
the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of the
Executive's death during the Employment Period, this Agreement shall terminate
without further obligations to the Executive's legal representatives under this
Agreement, other than for payment of Accrued Obligations and the timely payment
or provision of Other Benefits. Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more-favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason of
the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations and the timely payment or provision of Other Benefits.
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term Other Benefits as utilized in this Section 6(c) shall
include, and the Executive shall be entitled after the Disability Effective Date
to receive, disability and other benefits at least equal to the most favorable
of those generally provided by the Company and its affiliated companies to
disabled executives and/or their families in accordance with such plans,
programs, practices and policies relating to disability, if any, as in effect
generally with respect to other peer executives and their families at any time
during the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive and/or the
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Executive's family, as in effect at any time thereafter generally with respect
to other peer executives of the Company and its affiliated companies and their
families.
(d) Cause; Other than for Good Reason. If the Executive's employment shall
be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any setoff, counterclaim, recoupment, defense or other claim,
right or action which the Company may have against the Executive or others. In
no event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Agreement and such amounts shall not be reduced
14
<PAGE> 15
whether or not the Executive obtains other employment. The Company agrees to pay
as incurred, to the full extent permitted by law, all legal fees and expenses
which the Executive may reasonably incur as a result of any contest (regardless
of the outcome thereof) by the Company, the Executive or others of the validity
or enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as
amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and except
as set forth below, in the event it shall be determined that any payment or
distribution by the Company or its affiliates to or for the benefit of the
Executive (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 9) (a "Payment") would be
subject to excise or other similar tax, or federal income tax above the rate
ordinarily applicable to wages and salaries paid in the ordinary course of
business, whether as a result of the provisions of Sections 280G and 4999 of the
Code, any similar or analogous provisions of any statute or regulation adopted
subsequent to the date hereof, or otherwise, or any interest or penalties are
incurred by the Executive with respect to such tax (such excise tax, other
similar tax or federal income tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments. Notwithstanding the foregoing provisions of this
Section 9(a), if it shall be determined that the Executive is entitled to a
Gross-Up Payment, but that the Payments do not exceed 110% of the greatest
amount (the "Reduced Amount") that could be paid to the Executive such that the
receipt of Payments would
15
<PAGE> 16
not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the
Executive and the Payments, in the aggregate, shall be reduced to the Reduced
Amount.
(b) Subject to the provisions of Section 9(c), all determinations required
to be made under this Section 9, including whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to be
utilized in arriving at such determination, shall be made by Arthur Andersen
L.L.P. or such other certified public accounting firm as may be designated by
the Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 9(c) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in writing of such claim and shall apprise the Company of
16
<PAGE> 17
the nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of the
30-day period following the date on which it gives such notice to the Company
(or such shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Executive in writing
prior to the expiration of such period that it desires to contest such claim,
the Executive shall:
(i) give the Company any information reasonably requested by the Company
relating to such claim,
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such
claim by an. attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such
claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the
17
<PAGE> 18
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 9(c), a determination is made that
the Executive shall not be entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to contest
such denial of refund prior to the expiration of 30 days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without
18
<PAGE> 19
the prior written consent of the Company or as may otherwise be required by law
or legal process, communicate or divulge any such information, knowledge or data
to anyone other than the Company and those designated by it. In no event shall
an asserted violation of the provisions of this Section 10 constitute a basis
for deferring or withholding any amounts otherwise payable to the Executive
under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and without
the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to assume expressly and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without reference to principles
of conflict of laws. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This Agreement may not be
amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
19
<PAGE> 20
If to the Executive:
Roger A. Brown
If to the Company:
Smith International, Inc.
16740 Hardy Street
Houston, TX 77032
Fax: (281) 233-5996
Attention: General Counsel
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement.
(d) The Company may withhold from any amounts payable under this Agreement
such Federal, state, local or foreign taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise
be provided under any other written agreement between the Executive and the
Company, the
20
<PAGE> 21
employment of the Executive by the Company is "at will" and, subject to Section
l (a) hereof, prior to the Effective Date, the Executive's employment and/or
this Agreement may be terminated by either the Executive or the Company at any
time prior to the Effective Date, in which case the Executive shall have no
further rights under this Agreement ; provided, that this Agreement may not be
terminated by the Company if it is reasonably demonstrated by the Executive that
such termination (i) was at the request of a third party who has taken steps
reasonably calculated to effect a Change of Control or (ii) otherwise arose in
connection with or anticipation of a Change of Control. From and after the
Effective Date this Agreement shall supersede any other agreement between the
parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ ROGER A. BROWN
-------------------------------------
ROGER A. BROWN
SMITH INTERNATIONAL, INC.
By: /s/ DOUG ROCK
---------------------------------
Doug Rock
21
<PAGE> 1
EXHIBIT 10.21
================================================================================
SMITH INTERNATIONAL, INC.
THIRD AMENDMENT
Dated as of April 27, 1999
TO
NOTE AGREEMENT
Dated as of May 21, 1996
RE: 7.24% SENIOR GUARANTEED NOTES
DUE APRIL 2, 2001
AND
7.63% SENIOR GUARANTEED NOTES
DUE APRIL 2, 2006
================================================================================
<PAGE> 2
THIS THIRD AMENDMENT dated as of April 27, 1999 (the or this "Third
Amendment") to the several Note Agreements, each dated as of May 21, 1996
between SMITH INTERNATIONAL, INC., a Delaware corporation (the "Company"), and
each of the institutions identified in Schedule I thereto (collectively, the
"Purchasers"), as amended by the First Amendment and Waiver dated May 5, 1997
and the Second Amendment and Waiver dated July 31, 1998, is between the Company
and each of the institutions which is a signatory to this Third Amendment (the
"Required Noteholders").
RECITALS:
A. The Company and each of the Purchasers have heretofore entered into
separate and several Note Agreements, each dated as of May 21, 1996 (the "Note
Agreements") as amended by the First Amendment and Waiver dated May 5, 1997 (the
"First Amendment") and the Second Amendment and Waiver dated July 31, 1998 (the
"Second Amendment"). The Required Noteholders are the holders of at least
66-2/3% of the Company's 7.24% Senior Guaranteed Notes due April 2, 2001 in the
aggregate principal amount of $30,000,000 and the Company's 7.63% Senior
Guaranteed Notes due April 2, 2006 in the aggregate principal amount of
$20,000,000 (collectively, the "Notes") issued and sold under and pursuant to
the Note Agreements.
B. The Company and the Required Noteholders now desire to amend the
Note Agreements effective on April 27, 1999 (the "Third Amendment Effective
Date") in the respects, but only in the respects, hereinafter set forth.
Pursuant to Section 7.1 of the Note Agreements, the consent of the Required
Noteholders is required to amend the Note Agreements as contemplated herein.
C. Capitalized terms used herein but not otherwise defined shall have
the meanings assigned thereto in the Note Agreements.
NOW, THEREFORE, the acceptance hereof by the Required Noteholders and
the full and complete satisfaction of the conditions precedent to the
effectiveness of this Third Amendment set forth in Section 3.1 hereof, will
confirm the understanding of the Company and the Required Noteholders that the
Note Agreements shall be and are hereby amended in the following respects:
SECTION 1. AMENDMENTS.
SECTION 1.1. AMENDMENT OF DEFINITIONS.
(a) The definition of "Consolidated EBIT" set forth in Section 8.1 of
the Existing Note Agreements shall be and is hereby amended in its entirety so
that the same shall henceforth read as follows:
"Consolidated EBIT" for any period shall mean the sum of (a)
Consolidated Net Earnings during such period plus (to the extent deducted in
determining Consolidated Net Earnings), (b) all provisions for any Federal,
state or other income taxes made by the Company and its
1
<PAGE> 3
Subsidiaries during such period, and (c) Consolidated Interest Expense during
such period provided, however, for purposes of any computation of Consolidated
EBIT made for purposes of Section 5.7, Consolidated EBIT shall not be affected
by either (i) the unusual charge to earnings in the amount of $19,900,000 taken
by the Company in the third fiscal quarter of 1993 in connection with the
settlement of the litigation described in footnote (6) of the Company's SEC Form
10Q for the nine month period ended September 30, 1993; or (ii) the
restructuring charges taken by the Company in fiscal year ending December 31,
1998 in the amount of $65,686,000.
(b) The following definitions shall be and are hereby added to Section
8.1 of the Existing Note Agreements in their alphabetical order:
""Third Amendment" shall mean the Third Amendment dated as of April 27,
1999 to the Note Agreement entered into by the Company and the Required
Noteholders."
""Third Amendment Effective Date" shall mean April 27, 1999."
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to each of you that all of
the representations and warranties set forth in Exhibit A attached hereto are
true and correct as of the date of acceptance set forth on the signature pages
to this Third Amendment and are incorporated herein by reference with the same
force and effect as though herein set forth in full.
SECTION 3. MISCELLANEOUS.
SECTION 3.1. This Third Amendment shall become effective and binding
upon the Company and the holders of the Notes on the Third Amendment Effective
Date upon the acceptance hereof by the Required Noteholders in the space below
and upon the satisfaction in full of the following conditions:
(a) each of their holders of the Notes shall have received a
certificate dated the date of acceptance set forth on the signature pages to
this Third Amendment, signed by the President or a Vice-President of the
Company, the truth and accuracy of which shall be a condition to their
obligations under this Third Amendment to the effect that: (1) the
representations and warranties of the Company set forth in Exhibit A attached
hereto are true and correct on and with respect to the Third Amendment Effective
Date and (2) no Default or Event of Default has occurred and is then continuing,
after giving effect to the amendments set forth herein;
(b) the holders of the Notes shall have received, in form and substance
reasonably satisfactory to such holders and their special counsel, such
documents and evidence with respect to the Company as such holders may
reasonably request in order to establish the existence and good standing of the
Company and the authorization, execution and delivery of the Third Amendment;
2
<PAGE> 4
(c) the holders of the Notes shall have received an opinion of counsel
from counsel to the Company covering the matters set forth in clause (b) of this
Section 3.1 and such other matters relating to the Third Amendment as the
holders of the Notes may reasonably request;
(d) ACQCO shall have consented to the execution and delivery of this
Third Amendment and the holders of the Notes shall have received a true, correct
and complete originally executed copy thereof; and
(e) any consents or approvals from any holder or holders of any
outstanding Security of the Company or ACQCO and any amendments of agreements
pursuant to which any Securities may have been issued which shall be necessary
to permit the consummation of the transactions contemplated hereby shall have
been obtained and all such consents or amendments shall be reasonably
satisfactory in form and substance to the holders of the Notes and their special
counsel and such holders and their special counsel shall have received true,
correct and complete copies of such executed consents and amendments.
SECTION 3.2. The Company agrees to pay all reasonable fees and expenses
of the holders of the Notes and their special counsel in connection with the
preparation, execution and delivery of this Third Amendment.
SECTION 3.3. Whenever in any certificate, letter, notice or other
instrument reference is made to the Note Agreements, such reference without more
shall include reference to this Third Amendment.
SECTION 3.4. Except as modified and expressly amended by the Third
Amendment, the Note Agreements and the Notes are in all respects ratified,
confirmed and approved on all of the terms, provisions and conditions thereof
shall be and remain in full force and effect, including (without limitation),
Section 9.10, 9.11 and 9.13 of the Note Agreements. The descriptive headings of
the various Sections or parts of this Third Amendment are for convenience only
and shall not affect the meaning or construction of any of the provisions
hereof.
SECTION 3.5. This Third Amendment may be executed and delivered in any
number of counterparts, each of such counterparts constituting an original, but
all together only one Third Amendment.
3
<PAGE> 5
SMITH INTERNATIONAL, INC.
By: /s/ JOHN J. KENNEDY
------------------------------------
Its Senior Vice President, Chief
Financial Officer and Treasurer
By: /s/ MARGARET K. DORMAN
------------------------------------
Its Vice President, Controller
and Assistant Treasurer
Smith International, Inc. - Third Amendment To Note Agreement
<PAGE> 6
PRINCIPAL LIFE
INSURANCE COMPANY
By: /s/ CHRISTOPHER J. HENDERSON
------------------------------------
Its Counsel
By: /s/ JAMES FIFIELD
------------------------------------
Its Counsel
AGREED TO AND ACCEPTED
THIS 27th DAY OF APRIL, 1999:
Smith International, Inc. - Third Amendment To Note Agreement
<PAGE> 7
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By: /s/ WILLIAM A. KINSLEY
------------------------------------
Its Senior Investment Officer
AGREED TO AND ACCEPTED
THIS 27th DAY OF APRIL, 1999:
Smith International, Inc. - Third Amendment To Note Agreement
<PAGE> 8
JOHN HANCOCK VARIABLE LIFE
INSURANCE COMPANY
By: /s/ WILLIAM A. KINSLEY
------------------------------------
Its Authorized Signatory
AGREED TO AND ACCEPTED
THIS 27st DAY OF APRIL, 1999:
Smith International, Inc. - Third Amendment To Note Agreement
<PAGE> 9
IDS CERTIFICATE COMPANY
By:
------------------------------------
Its
AGREED TO AND ACCEPTED
THIS 27st DAY OF APRIL, 1999:
Smith International, Inc. - Third Amendment To Note Agreement
<PAGE> 10
MELLON BANK, N.A., SOLELY IN ITS
CAPACITY AS TRUSTEE FOR THE AT&T
MASTER PENSION TRUST (AS
DIRECTED BY JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY), AND NOT IN ITS
INDIVIDUAL CAPACITY
By:
------------------------------------
Its
AGREED TO AND ACCEPTED
THIS 27st DAY OF APRIL, 1999:
Smith International, Inc. - Third Amendment To Note Agreement
<PAGE> 11
THE MARITIME LIFE ASSURANCE
COMPANY
By:
------------------------------------
Its
AGREED TO AND ACCEPTED
THIS 27st DAY OF APRIL, 1999:
Smith International, Inc. - Third Amendment To Note Agreement
<PAGE> 12
EXHIBIT A
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to you as follows:
1. Corporate Organization and Authority. The Company and each
Subsidiary
(a) is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation and
has not commenced any proceedings to dissolve;
(b) has all requisite power and authority and all necessary
licenses and permits to own and operate its properties and to carry on
its business as now conducted and as presently proposed to be
conducted; and
(c) is duly licensed or qualified and is in good standing as a
foreign corporation in each jurisdiction wherein the nature of this
business transacted by it or the nature of the property owned or leased
by it makes such licensing or qualification necessary, except for such
jurisdictions wherein the failure to be so licensed or qualified would
not have a Material Adverse Effect.
2. Full Disclosure. Neither the Third Amendment nor any other written
statement furnished by the Company to you in connection with the negotiation of
the Third Amendment, contain any untrue statement of a material fact or omit a
material fact necessary to make the statement contained therein or herein not
misleading. There is no fact peculiar to the Company which the Company has not
disclosed to you in writing which materially affects adversely nor, so far as
the Company can now foresee, will materially affect adversely the properties,
business, prospects, profits or condition (financial or otherwise) of the
Company or the ability of the Company to enter into and perform the Third
Amendment.
3. Transactions Legal and Authorized. The execution and delivery of the
Third Amendment
(a) are within the corporate powers of the Company;
(b) will not violate any material provisions of any law or any
order of any court or governmental authority or agency and will not
conflict with or result in any breach of any of the terms, conditions
of provisions of, or constitute a default under, the Certificate of
Incorporation of By-laws of the Company or any loan agreement,
indenture or other agreement or instrument to which the Company will be
a party or by which it may be bound on the Third Amendment Effective
Date or result in the imposition of any Lien on any property of the
Company; and
- A - 1 -
<PAGE> 13
(c) have been duly authorized by proper corporate action on
the part of the Company (no action by the stockholders of the Company
being required by law, by the Certificate of Incorporation or the
By-laws of the Company or otherwise), executed and delivered by the
Company and the Third Amendment constitutes the legal, valid and
binding obligation, contract and agreement of the Company enforceable
in accordance with its terms.
4. Pending Litigation. There are no proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company in any
court or before any governmental authority or arbitration board or tribunal
which, if adversely determined, could in the aggregate have a material adverse
effect on the properties, business, prospects, profits or condition (financial
or otherwise) of the Company and its Subsidiaries. The Company is not in default
with respect to any order of any court or governmental authority or arbitration
board or tribunal.
5. No Defaults. Neither the Company nor any Subsidiary is in default
(a) in the payment of principal or interest on any Indebtedness for borrowed
money (b) under any instrument or instruments or agreements under and subject to
which any Indebtedness for borrowed money has been issued, and no event has
occurred and is continuing under the provisions of any such instrument or
agreement which with the lapse of time or the giving of notice, or both, would
constitute an event of default thereunder. Neither the Company nor any
Subsidiary is in violation of any term of any agreement, charter instrument,
regulation or other instrument to which it is a party or by which it may be
bound which violation would in the aggregate have a material adverse effect on
the business or the financial condition of the Company.
6. Consents. No approval, consent or withholding of objection on the
part of any regulatory body, state, Federal or local, is necessary in connection
with the execution and delivery by the Company of the Third Amendment or
compliance by the Company with any of the provisions thereof. All approval sand
consents required from any other Person for the due execution and delivery by
the Company of the Third Amendment and compliance by the Company with any of the
provisions thereof have been obtained and are in full force and effect.
7. Compliance with Law. Neither the Company nor any Subsidiary (a) is
in violation of any law, ordinance, franchise, governmental rule or regulation
to which it is subject; or (b) has failed to obtain any license, permit,
franchise or other governmental authorization necessary to the ownership of its
property or to the conduct of its business, which violation or failure to obtain
would, individually or in the aggregate, materially adversely affect the
business, prospects, profits, properties or condition (financial or otherwise)
of the Company and its Subsidiaries, taken as a whole, or impair the ability of
the Company to perform its obligations contained in the Third Amendment. Neither
the Company nor any Subsidiary is in default with respect to any order of any
court or governmental authority or arbitration board or tribunal.
- A - 2 -
<PAGE> 14
CONFIRMATION OF GUARANTY AGREEMENT
Smith International Acquisition Corp. (the "GUARANTOR") pursuant to
that certain Guaranty Agreement dated as of March 1, 1994 (the "GUARANTY"),
which has been executed and delivered by the Guarantor to the Noteholders (as
defined in the Guaranty), hereby agrees that its liabilities thereunder and the
Security Documents to which such Guarantor is a party are and shall remain
enforceable against such Guarantor in accordance with their terms, and are, and
shall continue to be, in full force and effect and shall not be reduced,
altered, limited, lessened or in any way affected by the execution and delivery
of the Third Amendment to Note Agreement dated as of even date herewith and to
which this Confirmation of Guaranty Agreement is attached, executed by the
Company (as defined in the Third Amendment) and the Required Noteholders (as
defined in the Third Amendment), and are hereby confirmed and ratified in all
respects.
WITNESS THE EXECUTION HEREOF, effective as of the 27st day of April,
1999.
SMITH INTERNATIONAL ACQUISITION CORP.
By: /s/ NEAL S. SUTTON
--------------------------------------------
Name: Neal S. Sutton
--------------------------------------
Title: Sr. VP-Admin., General Counsel & Sec.
---------------------------------------
<PAGE> 1
EXHIBIT 10.22
================================================================================
SMITH INTERNATIONAL, INC.
FOURTH AMENDMENT
Dated as of September 30, 1999
TO
NOTE AGREEMENT
Dated as of May 21, 1996
RE: 7.24% SENIOR GUARANTEED NOTES
DUE APRIL 2, 2001
AND
7.63% SENIOR GUARANTEED NOTES
DUE APRIL 2, 2006
================================================================================
<PAGE> 2
THIS FOURTH AMENDMENT dated as of September 30, 1999 (the or this
"Fourth Amendment") to the several Note Agreements, each dated as of May 21,
1996 between SMITH INTERNATIONAL, INC., a Delaware corporation (the "Company"),
and each of the institutions identified in Schedule I thereto (collectively, the
"Purchasers"), as amended by the First Amendment and Waiver dated May 5, 1997,
the Second Amendment and Waiver dated July 31, 1998, and the Third Amendment and
Waiver dated April 27, 1999, is between the Company and each of the institutions
which is a signatory to this Fourth Amendment (the "Required Noteholders").
RECITALS:
A. The Company and each of the Purchasers have heretofore entered into
separate and several Note Agreements, each dated as of May 21, 1996 (the "Note
Agreements") as amended by the First Amendment and Waiver dated May 5, 1997 (the
"First Amendment"), the Second Amendment and Waiver dated July 31, 1998 (the
"Second Amendment"), and the Third Amendment and Waiver dated April 27, 1999
(the "Third Amendment"). The Required Noteholders are the holders of at least
66-2/3% of the Company's 7.24% Senior Guaranteed Notes due April 2, 2001 in the
aggregate principal amount of $30,000,000 and the Company's 7.63% Senior
Guaranteed Notes due April 2, 2006 in the aggregate principal amount of
$20,000,000 (collectively, the "Notes") issued and sold under and pursuant to
the Note Agreements.
B. The Company and the Required Noteholders now desire to amend the
Note Agreements effective on September 30, 1999 (the "Fourth Amendment Effective
Date") in the respects, but only in the respects, hereinafter set forth.
Pursuant to Section 7.1 of the Note Agreements, the consent of the Required
Noteholders is required to amend the Note Agreements as contemplated herein.
C. Capitalized terms used herein but not otherwise defined shall have
the meanings assigned thereto in the Note Agreements.
NOW, THEREFORE, the acceptance hereof by the Required Noteholders and
the full and complete satisfaction of the conditions precedent to the
effectiveness of this Fourth Amendment set forth in Section 3.1 hereof, will
confirm the understanding of the Company and the Required Noteholders that the
Note Agreements shall be and are hereby amended in the following respects:
SECTION 1. AMENDMENTS.
SECTION 1.1. AMENDMENT OF SECTION 5.7. Section 5.7 (b) of the Existing
Note Agreements shall be and is hereby amended in its entirety so that the same
shall henceforth read as follows:
"Section 5.7. Certain Ratios.
1
<PAGE> 3
(b) The Company will not at any time permit the ratio of
Consolidated EBIT for the immediately preceding four fiscal quarter
period to Consolidated Interest Expense for the immediately preceding
four fiscal quarter period to be less than:
<TABLE>
<CAPTION>
DURING THE PERIOD: RATIO
<S> <C>
Effective Date through 1.20 to 1.00
September 30, 1999
October 1, 1999 through 1.50 to 1.00
December 31, 1999
January 1, 2000 through 2.00 to 1.00
March 31, 2000
April 1, 2000 and 2.50 to 1.00"
thereafter
</TABLE>
Section 1.1. Interpretation of Section 5.12. The Company and the
Required Noteholders agree that the joint venture transaction between the
Company and Schlumberger Ltd., which closed on July 14, 1999, by which
Schlumberger contributed its non-United States Drilling fluids assets and
operations together with cash and obtained a 40% interest in the joint venture
formed between Schlumberger Ltd. and M-I L.L.C., a wholly-owned subsidiary of
the Company, is not an asset sale or other transaction subject to the
limitations of Section 5.12 of the Note Agreement.
(b) The following definitions shall be and are hereby added to Section
8.1 of the Existing Note Agreements in their alphabetical order:
""Fourth Amendment" shall mean the Fourth Amendment dated as of
September 30, 1999 to the Note Agreement entered into by the Company
and the Required Noteholders."
""Fourth Amendment Effective Date" shall mean September 30, 1999."
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to each of you that all of
the representations and warranties set forth in Exhibit A attached hereto are
true and correct as of the date of acceptance set forth on the signature pages
to this Fourth Amendment and are incorporated herein by reference with the same
force and effect as though herein set forth in full.
2
<PAGE> 4
SECTION 3. MISCELLANEOUS.
SECTION 3.1. This Fourth Amendment shall become effective and binding
upon the Company and the holders of the Notes on the Fourth Amendment Effective
Date upon the acceptance hereof by the Required Noteholders in the space below
and upon the satisfaction in full of the following conditions:
(a) each of their holders of the Notes shall have received a
certificate dated the date of acceptance set forth on the signature pages to
this Fourth Amendment, signed by the President or a Vice-President of the
Company, the truth and accuracy of which shall be a condition to their
obligations under this Fourth Amendment to the effect that: (1) the
representations and warranties of the Company set forth in Exhibit A attached
hereto are true and correct on and with respect to the Fourth Amendment
Effective Date and (2) no Default or Event of Default has occurred and is then
continuing, after giving effect to the amendments set forth herein;
(b) the holders of the Notes shall have received, in form and substance
reasonably satisfactory to such holders and their special counsel, such
documents and evidence with respect to the Company as such holders may
reasonably request in order to establish the existence and good standing of the
Company and the authorization, execution and delivery of the Fourth Amendment;
(c) the holders of the Notes shall have received an opinion of counsel
from counsel to the Company covering the matters set forth in clause (b) of this
Section 3.1 and such other matters relating to the Fourth Amendment as the
holders of the Notes may reasonably request;
(d) ACQCO shall have consented to the execution and delivery of this
Fourth Amendment and the holders of the Notes shall have received a true,
correct and complete originally executed copy thereof; and
(e) any consents or approvals from any holder or holders of any
outstanding Security of the Company or ACQCO and any amendments of agreements
pursuant to which any Securities may have been issued which shall be necessary
to permit the consummation of the transactions contemplated hereby shall have
been obtained and all such consents or amendments shall be reasonably
satisfactory in form and substance to the holders of the Notes and their special
counsel and such holders and their special counsel shall have received true,
correct and complete copies of such executed consents and amendments.
SECTION 3.2. The Company agrees to pay all reasonable fees and expenses
of the holders of the Notes and their special counsel in connection with the
preparation, execution and delivery of this Fourth Amendment.
SECTION 3.3. Whenever in any certificate, letter, notice or other
instrument reference is made to the Note Agreements, such reference without more
shall include reference to this Fourth Amendment.
SECTION 3.4. Except as modified and expressly amended by the Fourth
Amendment, the Note Agreements and the Notes are in all respects ratified,
confirmed and approved on all of the terms, provisions and conditions thereof
shall be and remain in full force and effect, including
3
<PAGE> 5
(without limitation), Section 9.10, 9.11 and 9.13 of the Note Agreements. The
descriptive headings of the various Sections or parts of this Fourth Amendment
are for convenience only and shall not affect the meaning or construction of any
of the provisions hereof.
SECTION 3.5. This Fourth Amendment may be executed and delivered in any
number of counterparts, each of such counterparts constituting an original, but
all together only one Fourth Amendment.
4
<PAGE> 6
SMITH INTERNATIONAL, INC.
By: /s/ MARGARET K. DORMAN
-----------------------------------------
Its Senior Vice President, Chief
Financial Officer and Treasurer
By: /s/ NEAL S. SUTTON
-----------------------------------------
Its Senior Vice President - Administration,
General Counsel and Secretary
Smith International, Inc. - Fourth Amendment To Note Agreement
<PAGE> 7
PRINCIPAL LIFE
INSURANCE COMPANY
BY: PRINCIPAL CAPITAL
MANAGEMENT LLC,
A DELAWARE LIMITED LIABILITY
COMPANY
ITS AUTHORIZED SIGNATORY
By: /s/ JON C. HEINY, Counsel
----------------------------------------
By: /s/ JAMES C. FIFIELD, Counsel
----------------------------------------
AGREED TO AND ACCEPTED
THIS 30th DAY OF SEPTEMBER, 1999:
Smith International, Inc. - Fourth Amendment To Note Agreement
<PAGE> 8
JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By: /s/ EUGENE HODGE, JR.
----------------------------------------
Its Senior Investment Officer
AGREED TO AND ACCEPTED
THIS 30th DAY OF SEPTEMBER, 1999:
Smith International, Inc. - Fourth Amendment To Note Agreement
<PAGE> 9
JOHN HANCOCK VARIABLE LIFE
INSURANCE COMPANY
By: /s/ EUGENE HODGE, JR.
----------------------------------------
Its Authorized Officer
AGREED TO AND ACCEPTED
THIS 30th DAY OF SEPTEMBER, 1999:
Smith International, Inc. - Fourth Amendment To Note Agreement
<PAGE> 10
IDS CERTIFICATE COMPANY
By:
---------------------------
Its
AGREED TO AND ACCEPTED
THIS 30th DAY OF SEPTEMBER, 1999:
Smith International, Inc. - Fourth Amendment To Note Agreement
<PAGE> 11
MELLON BANK, N.A., SOLELY IN ITS
CAPACITY AS TRUSTEE FOR THE LONG-TERM
INVESTMENT TRUST, (AS DIRECTED BY JOHN
HANCOCK MUTUAL LIFE INSURANCE
COMPANY), AND NOT IN ITS INDIVIDUAL
CAPACITY
By: /s/ CAROLE BRUNO
-----------------------------------------
Its Authorized Signatory
AGREED TO AND ACCEPTED
THIS 30th DAY OF SEPTEMBER, 1999:
Smith International, Inc. - Fourth Amendment To Note Agreement
<PAGE> 12
THE MARITIME LIFE ASSURANCE
COMPANY
By: /s/ LAURIE A. HARDING
-----------------------------------------
Its Vice President, Private Placements
By: /s/ PETER A. STUART
-----------------------------------------
Its Senior Vice President
Chief Investment Officer
AGREED TO AND ACCEPTED
THIS 30th DAY OF SEPTEMBER, 1999:
Smith International, Inc. - Fourth Amendment To Note Agreement
<PAGE> 13
EXHIBIT A
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to you as follows:
1. Corporate Organization and Authority. The Company and each
Subsidiary
(a) is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation and
has not commenced any proceedings to dissolve;
(b) has all requisite power and authority and all necessary
licenses and permits to own and operate its properties and to carry on
its business as now conducted and as presently proposed to be
conducted; and
(c) is duly licensed or qualified and is in good standing as a
foreign corporation in each jurisdiction wherein the nature of this
business transacted by it or the nature of the property owned or leased
by it makes such licensing or qualification necessary, except for such
jurisdictions wherein the failure to be so licensed or qualified would
not have a Material Adverse Effect.
2. Full Disclosure. Neither the Fourth Amendment nor any other written
statement furnished by the Company to you in connection with the negotiation of
the Fourth Amendment, contain any untrue statement of a material fact or omit a
material fact necessary to make the statement contained therein or herein not
misleading. There is no fact peculiar to the Company which the Company has not
disclosed to you in writing which materially affects adversely nor, so far as
the Company can now foresee, will materially affect adversely the properties,
business, prospects, profits or condition (financial or otherwise) of the
Company or the ability of the Company to enter into and perform the Fourth
Amendment.
3. Transactions Legal and Authorized. The execution and delivery of the
Fourth Amendment
(a) are within the corporate powers of the Company;
(b) will not violate any material provisions of any law or any
order of any court or governmental authority or agency and will not
conflict with or result in any breach of any of the terms, conditions
of provisions of, or constitute a default under, the Certificate of
Incorporation of By-laws of the Company or any loan agreement,
indenture or other agreement or instrument to which the Company will be
a party or by which it may be bound on the Fourth Amendment Effective
Date or result in the imposition of any Lien on any property of the
Company; and
-A-1-
<PAGE> 14
(c) have been duly authorized by proper corporate action on
the part of the Company (no action by the stockholders of the Company
being required by law, by the Certificate of Incorporation or the
By-laws of the Company or otherwise), executed and delivered by the
Company and the Fourth Amendment constitutes the legal, valid and
binding obligation, contract and agreement of the Company enforceable
in accordance with its terms.
4. Pending Litigation. There are no proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company in any
court or before any governmental authority or arbitration board or tribunal
which, if adversely determined, could in the aggregate have a material adverse
effect on the properties, business, prospects, profits or condition (financial
or otherwise) of the Company and its Subsidiaries. The Company is not in default
with respect to any order of any court or governmental authority or arbitration
board or tribunal.
5. No Defaults. Neither the Company nor any Subsidiary is in default
(a) in the payment of principal or interest on any Indebtedness for borrowed
money (b) under any instrument or instruments or agreements under and subject to
which any Indebtedness for borrowed money has been issued, and no event has
occurred and is continuing under the provisions of any such instrument or
agreement which with the lapse of time or the giving of notice, or both, would
constitute an event of default thereunder. Neither the Company nor any
Subsidiary is in violation of any term of any agreement, charter instrument,
regulation or other instrument to which it is a party or by which it may be
bound which violation would in the aggregate have a material adverse effect on
the business or the financial condition of the Company.
6. Consents. No approval, consent or withholding of objection on the
part of any regulatory body, state, Federal or local, is necessary in connection
with the execution and delivery by the Company of the Fourth Amendment or
compliance by the Company with any of the provisions thereof. All approval sand
consents required from any other Person for the due execution and delivery by
the Company of the Fourth Amendment and compliance by the Company with any of
the provisions thereof have been obtained and are in full force and effect.
7. Compliance with Law. Neither the Company nor any Subsidiary (a) is
in violation of any law, ordinance, franchise, governmental rule or regulation
to which it is subject; or (b) has failed to obtain any license, permit,
franchise or other governmental authorization necessary to the ownership of its
property or to the conduct of its business, which violation or failure to obtain
would, individually or in the aggregate, materially adversely affect the
business, prospects, profits, properties or condition (financial or otherwise)
of the Company and its Subsidiaries, taken as a whole, or impair the ability of
the Company to perform its obligations contained in the Fourth Amendment.
Neither the Company nor any Subsidiary is in default with respect to any order
of any court or governmental authority or arbitration board or tribunal.
-A-2-
<PAGE> 15
CONFIRMATION OF GUARANTY AGREEMENT
Smith International Acquisition Corp. (the "GUARANTOR") pursuant to
that certain Guaranty Agreement dated as of March 1, 1994 (the "GUARANTY"),
which has been executed and delivered by the Guarantor to the Noteholders (as
defined in the Guaranty), hereby agrees that its liabilities thereunder and the
Security Documents to which such Guarantor is a party are and shall remain
enforceable against such Guarantor in accordance with their terms, and are, and
shall continue to be, in full force and effect and shall not be reduced,
altered, limited, lessened or in any way affected by the execution and delivery
of the Fourth Amendment to Note Agreement dated as of even date herewith and to
which this Confirmation of Guaranty Agreement is attached, executed by the
Company (as defined in the Fourth Amendment) and the Required Noteholders (as
defined in the Fourth Amendment), and are hereby confirmed and ratified in all
respects.
WITNESS THE EXECUTION HEREOF, effective as of the 30th day of
September, 1999.
SMITH INTERNATIONAL ACQUISITION CORP.
By: /s/ NEAL S. SUTTON
-------------------------------------------
Name: Neal S. Sutton
--------------------------------------
Title: Sr. VP-Admin., General Counsel & Sec.
-------------------------------------
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
The following table sets forth all subsidiaries of Smith International,
Inc., other than inactive and insignificant subsidiaries that, considered in the
aggregate, would not constitute a significant subsidiary, indicating the
percentage of issued and outstanding voting securities beneficially owned by it:
<TABLE>
<CAPTION>
% of Direct
Where and Indirect
Name of Subsidiary Incorporated Ownership
- ------------------ ------------ ------------
<S> <C> <C>
Smith Internacional,
S.A. de C.V. Mexico 100%
Omega II Insurance Ltd. Bermuda 100%
S.I. Nederland B.V. Netherlands 100%
Smith International
Acquisition Corp. Delaware 100%
Smith International
Australia (Pty) Ltd. Australia 100%
Smith International
Canada Ltd. Canada 100%
Smith International
do Brasil Ltda. Brazil 100%
Smith International
Deutschland GmbH Germany 100%
Smith International
Gulf Services Ltd.* U.A.E. 49%
Smith International
France, S.A.R.L. France 100%
Smith International
Italia, S.p.A. Italy 100%
Smith International
(North Sea) Ltd. Scotland 100%
Smith Internacional
de Venezuela, C.A. Venezuela 100%
</TABLE>
- -------------------------------------------------------------------
* Not consolidated; accounted for on the equity method of accounting.
Except as indicated, all of the above subsidiaries are included in the Company's
consolidated financial statements.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated January 28, 2000 included in this
Form 10-K into the Company's previously filed Registration Statement File No.
33-31556, No. 33-69840, No. 33-56693, No. 333-34249, No. 333-47729,
No 333-62629, No. 333-76633, No. 333-76635 and No. 333-80091.
ARTHUR ANDERSEN LLP
Houston, Texas
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 24,127
<SECURITIES> 0
<RECEIVABLES> 483,750
<ALLOWANCES> 9,636
<INVENTORY> 497,414
<CURRENT-ASSETS> 1,054,780
<PP&E> 696,621
<DEPRECIATION> 315,539
<TOTAL-ASSETS> 1,894,575
<CURRENT-LIABILITIES> 457,318
<BONDS> 346,647
0
0
<COMMON> 49,586
<OTHER-SE> 670,634
<TOTAL-LIABILITY-AND-EQUITY> 1,894,575
<SALES> 1,806,153
<TOTAL-REVENUES> 1,806,153
<CGS> 1,338,213
<TOTAL-COSTS> 1,338,213
<OTHER-EXPENSES> 316,379
<LOSS-PROVISION> 2,029
<INTEREST-EXPENSE> 38,773
<INCOME-PRETAX> 110,759
<INCOME-TAX> 47,865
<INCOME-CONTINUING> 56,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,724
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.15
</TABLE>
